EUR/USD flattens near 1.05 in the run-up to EU inflation figures

• EUR/USD struggled to find momentum on Tuesday, stuck near 1.0500.
• The trading week has been shortened by a US holiday on Thursday, limited Friday hours.
• EU inflation figures are due on Friday, with a thin calendar until then.

EUR/USD cycled the 1.0500 handle on Tuesday, with Fiber price action drifting into the near-term middle ground as directional momentum drains out of the pair. The economic calendar is an overall thin affair this week, with the US Thanksgiving holiday on Thursday trimming late-week market momentum. US markets will also see limited trading hours on Friday, further crimping the week’s potential for big plays.

According to the Federal Reserve's (Fed) latest Meeting Minutes, members of the Federal Open Market Committee (FOMC) continue to remain cautious about the pace of rate cuts looking forward. Overall, the Fed's key group of policymakers seemed to agree that downside risks in the employment landscape and inflation outlook have decreased. Still, the pace of rate cuts is unlikely to accelerate further unless weak points open up in the jobs market and price growth starts to slump. According to the CME's FedWatch Tool, rate traders have slightly solidified bets of a 25 bps rate trim when the Fed makes its final rate call of 2024 on December 18, with rate markets pricing in 60% odds of a quarter-point rate cut and the remaining 40% expecting a rate hold.

This week sees a firm drought of EU-based datapoints through most of the week, with a fresh round of European Harmonized Index of Consumer Prices (HICP) inflation slated for Friday. Preliminary pan-EU HICP inflation for November is set to swing higher on an annualized basis, a looming threat that European Central Bank (ECB) policymakers have been scrambling to get out in front of. According to ECB officials, a near-term uptick in broad EU inflation metrics shouldn’t be a cause for concern for investors.

Wednesday will bring another update to US Personal Consumption Expenditure Price Index (PCEPI) inflation, a key reading of price increases underpinning the US economy. Wednesday also brings a quarterly update of US Gross Domestic Product (GDP) growth. Annualized core PCEPI inflation is set to accelerate again in October and forecast to increase to 2.8% from the previous 2.7%. QoQ US GDP growth in the third quarter is expected to hold steady at 2.8%.

EUR/USD price forecast

EUR/USD caught a bid on Greenback softness to retest the 1.0500 handle earlier this week. However, Fiber buyers remain unable to break through the key technical metric neatly, and the pair is set to continue struggling with familiar technical barriers in the near term. EUR/USD price action has found some breathing room after hitting a 24-month low late last week, but the climb up is looking very far for Fiber bulls to reclaim anything approaching bullish territory.

EUR/USD daily chart

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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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