EUR/USD is looking to rise from the lower bound ahead of the headline Consumer Price Index (CPI) reading
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- The EUR/USD pair rose on Tuesday, regaining the 1.0300 level.
- Euro traders are pinning their hopes that the French agreement will avoid the collapse of the government.
- Headline US CPI inflation numbers are due on Wednesday.
The EUR/USD pair found enough strength to rally intraday Tuesday, rising more than eight-tenths of one percent on the day as euro bidders hoped a potential deal in France would avert a complete collapse of the European country’s government. Market sentiment improved on Tuesday, boosting fiber bids after US Producer Price Index (PPI) inflation rose at a slower-than-expected pace. Economic data remains limited on the European side of the market space, leaving fiber traders to deal with overall dollar inflows.
Headline PPI inflation rose to 3.3% y/y, up from 3.0% previously, while core PPI inflation rose to 3.5% y/y, compared to the previous rate of 3.4%. Although both sides came in below expectations, inflationary pressures remain, albeit at a slightly less severe intensity than many economists had expected. As inflation indicators continue to exceed the Federal Reserve’s annual targets, lower-than-expected Producer Price Index results provide little distinction regarding expectations for interest rate cuts.
Regarding Wednesday’s US data, the CPI is expected to rise to 2.9% year-on-year from the previous 2.7%, remaining well above the Federal Reserve’s annual inflation target of 2.0%.
EUR/USD price forecast
The EUR/USD pair rose back to the 1.0300 level on Tuesday, heading into Wednesday in a notable uptrend, but the pair remains buried deep on the downside of the charts. The pair briefly fell below 1.0200 earlier this week, hitting a new 265-month low.
Fiber is trading well below the 200-day Exponential Moving Average (EMA) after facing technical rejection on the downside of the key EMA in November. While the 1.0200 level may be a suitable near-term technical bottom for the bulls to stage a rebound, calm traders will wait and look for signs of a higher decline as the EUR/USD pair breathes its way through the first quarter.
Daily chart of EUR/USD
Frequently asked questions about the euro
The euro is the official currency of the nineteen European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of more than $2.2 trillion per day. The EUR/USD is the most widely traded currency pair in the world, accounting for a 30% discount on 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 euro area. The European Central Bank 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 to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – usually benefit the euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is one of the important economic indicators for the euro. If inflation rises beyond expected, especially if it is above the ECB’s 2% target, this forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts usually benefit the euro, because they make the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can affect the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer confidence 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, it may encourage the European Central Bank to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro will likely fall. Economic data for the four largest Eurozone economies (Germany, France, Italy and Spain) are of particular interest, as they represent 75% of the Eurozone economy.
Another important data 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 during a certain period. If a country produces highly desirable exports, its currency will gain value from the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.