- EUR/USD remains near its four-month high of 1.0888, reached on Friday.
- The US Dollar struggles amid worries about a potential slowdown in the US economy.
- The Euro gained support from Germany’s fiscal reforms, with major political parties planning to revise the debt brake.
EUR/USD started the week on a positive note, trading around 1.0860 during Monday’s Asian session. The pair’s upward movement is largely driven by concerns over a potential slowdown in the United States (US) economy. San Francisco Fed President Mary Daly said late Sunday that rising uncertainty among businesses could dampen demand in the US economy but does not justify a change in interest rates.
On Friday, data from the US Bureau of Labor Statistics (BLS) showed that Nonfarm Payrolls (NFP) increased by 151,000 in February, falling short of the expected 160,000. January’s job growth was also revised downward to 125,000 from the previously reported 143,000. The weaker-than-expected labor market data could weigh on the US Dollar (USD), providing a tailwind for the EUR/USD pair.
Meanwhile, US Commerce Secretary Howard Lutnick stated on Sunday that the 25% tariffs, imposed by President Donald Trump in February, on steel and aluminum imports, set to take effect on Wednesday, are unlikely to be postponed, according to Bloomberg. While US steelmakers have urged Trump to maintain the tariffs, businesses reliant on these materials may face increased costs. This could dampen market sentiment, supporting the US Dollar and potentially capping EUR/USD’s upside.
The Euro (EUR) found support from Germany’s fiscal reforms, as the country’s major political parties announced plans to revise the debt brake. The proposed changes aim to increase defense spending and fund a €500 billion infrastructure initiative to stimulate economic growth. Additionally, European leaders agreed to a substantial boost in defense spending to strengthen the continent’s military capabilities.
On the monetary policy front, the European Central Bank (ECB) delivered a widely expected 25 basis points (bps) rate cut and acknowledged that policy is becoming less restrictive, hinting at a potential pause in further reductions. Market participants anticipate one or two additional 25bps rate cuts later this year.
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.
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