Euro hesitates at 1.1200 with Oil and bonds limiting upside attempts
- EUR/USD languishes at 1.1200 on track for a 3.5% decline in a five-week bearish cycle.
- Ongoing concerns about France's debt and the rebound in Oil prices are keeping investors away from the Euro.
- In the US, the focus is on next week's CPI and PPI releases for further insight about the timing of the next Fed rate hike.
The Euro (EUR) is trading flat at 1.1200 against the US Dollar (USD) on Thursday, as the rebound in oil prices and the ongoing tensions in bond markets keep EUR/USD buyers in check. Looking from a wider perspective, the pair maintains its broader bearish trend intact, on track for a 3.5% sell-off in a five-week losing streak.
The bond markets’ rout has set the Euro in the eye of the storm, as France’s borrowing costs soared to levels above those of the 2009 financial crisis. With the French government in a gridlock, the Governor of the Bank of France has felt compelled to come out and assure that the country does not need help from the European Central Bank, which has not precisely soothed investors.
Oil prices' rally increases pressure on the Euro
Against this background, the Oil price rally is only making things worse. On the one hand, it adds pressure on Eurozone Crude-importing economies, while, on the other, it spurs market expectations that central banks will have to pursue restrictive policies to combat inflation, ultimately contributing to higher global yields.
Brent Oil prices have hit fresh three-week highs just above $103.00 on Thursday after rallying nearly 2.8% on the day so far. A new round of attacks by Houthi militias on Saudi airports has killed three people and threatens to escalate the hostilities in the region. Beyond that, reports of an increase in attacks on Oil vessels crossing the Strait of Hormuz have prompted shipping companies to raise hiring rates for tankers, altogether pushing prices up.
In the US, the minutes of September’s Federal Reserve’s (Fed) monetary policy meeting highlighted inflation as the main risk to the economy, but did not change the view that the bank will stand pat on rates in October. The focus now shifts to the Consumer Price Index (CPI) and Producer Price Index (PPI) readings next week, for confirmation of a December rate hike.
Euro FAQs
The Euro is the currency for the 20 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.