EUR/USD rises 0.5% after USD liquidity retreated on Tuesday
European economic data remains scarce, Fed Chairman Powell pitches stable rate plan
US CPI and PPI inflation data to be released mid-week
EUR/USD snapped a three-day losing streak and climbed back above 1.0350 as broad market liquidity reversed away from the safe-haven USD and investor sentiment generally improved. Investors ignored US President Donald Trump's latest tariff threats, with Federal Reserve (Fed) Chairman Jerome Powell reiterating the Fed's commitment to a data-dependent approach in the face of the Trump administration's erratic and inconsistent trade policy messaging.
Jerome Powell testimony: Will commit to follow tariff-impacted data Fed's Williams: US should grow 2% in 2025 and 2026 Fed's Hammark: Keeping rates steady in the near term may be appropriate
European data releases were generally lackluster this week. Germany's final January harmonized consumer price index will be released on Thursday, and pan-European fourth-quarter GDP data is scheduled for Friday. Since neither data is preliminary and European data is usually well-anticipated and priced in before release, they are not expected to have much impact on the market.
US Consumer Price Index (CPI) inflation will be the main data on Wednesday. US CPI inflation is expected to remain at 2.9% year-on-year, while core CPI inflation is expected to fall to 3.1% from 3.2% last time. US Producer Price Index (PPI) inflation will be released on Thursday, with core PPI business-level inflation expected to edge down slightly from 3.5% to 3.3%.
EUR/USD traders found the buy button on Tuesday, pushing the pair back above 1.0350. The euro ended a three-day losing streak. However, momentum remains limited and the pair continues to trade below a familiar congestion zone around the 50-day exponential moving average (EMA), close to 1.0430.
The Euro is the currency of the 19 European Union countries that belong to the Eurozone. It is the second most traded currency in the world after the U.S. dollar. In 2022, the Euro accounted for 31% of total foreign exchange transactions, with an average daily turnover of more than $2.2 trillion. EUR/USD is the world's most traded currency pair, accounting for about 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank, based in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB's main task is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is to raise or lower interest rates. Relatively high interest rates - or expectations of higher interest rates - are generally good for the euro, and vice versa. The ECB's Governing Council meets eight times a year to make monetary policy decisions. Decisions are made by the presidents of the eurozone's national banks and the six permanent members, including ECB President Christine Lagarde.
"Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation is higher than expected, especially above the ECB's 2% target, the ECB will have to raise interest rates to control inflation. Relatively high interest rates compared to other countries are generally good for the euro because it makes the region more attractive as a place for global investors to put their money. ”
Data released can measure the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and service PMIs, employment and consumer confidence surveys can all affect the direction of the euro. A strong economy is good for the euro. Not only will this attract more foreign investment, it may also encourage the European Central Bank to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro may fall. Economic data from the four largest economies in the eurozone (Germany, France, Italy and Spain) is particularly important because they account for 75% of the eurozone economy."
"Another important statistic for the euro is the trade balance. This indicator measures the difference between a country's export revenue and import expenditure over a given period. If a country produces popular exports, then its currency will gain value purely from the additional demand created by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance will strengthen the currency, and vice versa."