EUR/USD moves below 1.0300 due to dovish sentiment surrounding ECB, US Retail Sales eyed
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Akhtar Faruqui
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16 Jan @ 05:31 (GMT+0)

EUR/USD moves below 1.0300 due to dovish sentiment surrounding ECB, US Retail Sales eyed

  • EUR/USD struggles as the ECB could implement additional policy easing amid a weak economic outlook in the Eurozone.
  • The US Dollar depreciated as speculation grew that the Fed may implement two interest rate cuts this year.
  • US Retail Sales could increase by 0.6% month-over-month in December, against the previous 0.7% growth.

EUR/USD extends losses for the second successive session, trading around 1.0280 during the Asian hours on Thursday. The EUR/USD pair faces downward pressure as European Central Bank (ECB) officials continue to reinforce market expectations of further policy easing, driven by the Eurozone's weak economic outlook.

At a conference on Monday, ECB policymaker and Bank of Finland Governor Olli Rehn stated that he anticipates monetary policy will exit restrictive territory within the coming months, likely by “midsummer.”

However, the EUR/USD pair gained ground as the US Dollar (USD) extended its decline following the cooler-than-expected US Consumer Price Index (CPI) inflation data for December, which heightened speculation that the US Federal Reserve (Fed) could implement two interest rate cuts this year.

The US CPI rose by 2.9% year-over-year in December, up from 2.7% in November, matching market expectations. The monthly CPI increased by 0.4%, following a 0.3% rise in November. US Core CPI, excluding volatile food and energy prices, increased by 3.2% annually in December, slightly below both the previous month's 3.3% and analysts' forecast of 3.3%. Core CPI edged up by 0.2% month-over-month in December 2024.

The Federal Reserve reported in its latest Beige Book survey, released on Wednesday, that economic activity saw slight to moderate growth across the twelve Federal Reserve Districts in late November and December. Consumer spending increased moderately, driven by strong holiday sales that surpassed expectations. However, manufacturing activity experienced a slight decline overall, as some manufacturers stockpiled inventories in anticipation of higher tariffs.

Euro FAQs

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.