A Report by CYS Global Remit Counterparty Sales & Alliance Unit
The EUR/USD currency pair, also known as the Eurodollar or Fiber, represents the exchange rate between the Euro and the US dollar, two of the world's most traded currencies. It represents the exchange rate between the Euro, the official currency of the Eurozone, and the US dollar, the official currency of the United States.
Beyond its significance in the forex market, the EUR/USD pair serves as a reflection of the economic and political relationship between the Eurozone and the United States.
Overall, the EUR/USD currency pair serves as a crucial benchmark in the international financial system, reflecting not only the economic fundamentals, but also the geopolitical and market dynamics between the two major economic blocs.
Euro downward pressure from dovish remarks
During trading hours on Wednesday, the EUR/USD pair hovered near 1.0920. Tuesday however, witnessed volatility for the pair, largely influenced by the release of February’s inflation data from Germany and the United States. While the German inflation figures aligned with expectations, US inflation numbers surpasses expectations.
Germany’s statistics office, “Destatis”, reported figures for the Harmonized Index of Consumer Prices (HICP) for February, maintaining a year-on-year consistency at 2.7%, meeting expectations. The monthly index remained unchanged at 0.6%.
The European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau indicated a consensus with the ECB to initiate interest rate cuts later in the year, citing progress in addressing inflation. He also further emphasized the ECB’s autonomy in the adjusting of interest rates, underscoring the institution’s pragmatic approach to rate policy.
Showing similar sentiments, Bank of France Governor, Robert Holzmann, suggested in an interview with news outlet MNI that the ECB is more inclined to cut rates in June rather than in April, contingent upon confirmed projections amid heightened uncertainty. Governor of the National Bank of Belgium, Pierre Wunsch, echoed similar sentiments, expressing the necessity for the ECB to consider an interest rate cut soon, despite ongoing concerns about wage inflation and price rises.1
Upbeat US CPI report
Improved performances in the US Treasury Yields have provided support for the US dollar, which received an additional boost from a stronger-than-anticipated Consumer Price Index (CPI) report. This outcome has diminished expectations of an imminent rate cut by the Federal Reserve, thereby reinforcing the greenback, and presenting challengers for the EUR/USD pair.
In February, the US CPI year-over-year surged by 3.2%, surpassing estimates of 3.1%. Meanwhile, the monthly index met with expectations, standing at 0.4%, higher than the previously recorded 0.3%. Additionally, the US Core CPI, which excludes volatile food and energy prices, registered a year-over-year increase of 3.8%, exceeding the anticipated 3.7% but falling below the previous reading of 3.9%. Similarly, the month-over-month figure remained stable at 0.4%, aligning with market expectations and surpassing the previous 0.3% reading.
The spotlight will now be on the forthcoming US Core Producer Price Index (PPI) and Retail Sales data, slated for release later this week. These key economic indicators will likely play a pivotal role in the shaping of market sentiments as well as determining the trajectory of the EUR/USD pair in the near term.
USD surges after release of PPI report
The U.S. dollar saw a notable surge on Thursday, following a period of relatively subdued performance, as U.S. Treasury yields soared in response to a higher-than-expected February Producer Price Index (PPI) figures, which came hot on the heels of Tuesday's elevated CPI report.
Additionally, the labour market data indicating that the number of Americans applying for jobless benefits remained at historically low levels last week, contributing to the greenback’s gain, while bolstering confidence in the economic outlook of the United States.
While the Federal Reserve (Fed) has suggested that it may be appropriate to ease policy restrictions this year, sluggish progress in combating inflation, coupled with the resilience of the economy, could limit the scope for imminent rates cuts and potentially delay the commencement of the anticipated easing cycle, currently projected for June.
Support for the EUR/USD
The US consumer inflation data for February exceeded expectations, fuelling speculation that the Federal Reserve might postpone any interest rate cuts decisions. This sentiment acts as a tailwind for the US Dollar. In contrast, the European Central Bank officials overwhelmingly supported the case for the first rate cut of the year, with discussions also suggesting the possibility of a further movement later in the year. This action undermines the Euro (EUR) and contributes to limiting the upside potential for the EUR/USD pair.
More insights into the Fed’s monetary policy stance will be available next week during the meeting of policymakers, where more updated projections will be released.
Sources: