EUR/USD retraces on progress in US-EU trade talks, dovish ECB
- EUR/USD faces selling pressure above 1.1400 as the US Dollar rebounds on increased hopes of a quick bilateral trade deal between the US and the EU.
- European officials asked domestic companies to provide details on US investment proposals.
- Inflation in France cools down in May, potentially increasing the odds of interest rate cuts in June.
EUR/USD corrects to near 1.1350 during European trading hours on Tuesday after revisiting the monthly high of 1.1425 the previous day. The major currency pair faces selling pressure as the US Dollar (USD) strengthens on progress in a potential trade deal between the United States (US) and the European Union (EU).
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, claws back its initial losses and rises 0.4% to near 99.35.
According to a report from Reuters, EU officials have asked domestic business owners to submit their US investment plans, a move that reflects significant efforts from the old continent to speed up the formation of a trade proposal.
On Monday, a post from European Trade Commissioner Maros Sefcovic at X, stating that the EU is committed to quickening progress towards a trade deal between economies on both sides of the Atlantic, diminished trade tensions. “The EU Commission remains fully committed to constructive efforts at pace towards an EU-US deal. We continue to stay in constant contact," Sefcovic wrote.
The US Dollar faced a sharp sell-off on Friday and Monday due to ever-changing statements from Washington over tariff policies to the EU. On Friday, US President Donald Trump proposed 50% tariffs on imports from the EU, but postponed them from June 1 to July 9 after a “good phone call” with European Commission President Ursula von der Leyen, who assured to advance trade negotiations quickly and urged for some time to reach a good deal. The event led financial market participants to reassess the credibility of the US Dollar.
Daily digest market movers: EUR/USD faces pressure as ECB officials see room for more interest rate cuts
- EUR/USD faces selling pressure after the release of the preliminary France Consumer Price Index (CPI) (EU norm) data for May. The CPI report showed that price pressures cooled down significantly as inflation declined by 0.2% on a monthly basis after expanding strongly by 0.7% in April. Year-on-year, the CPI rose at a slower pace of 0.6%, compared to a 0.9% increase seen in April.
- Soft France’s inflation data is expected to encourage European Central Bank (ECB) officials to incline towards easing the monetary policy further. After the inflation data, ECB policymaker and French central bank chief François Villeroy de Galhau mentioned in a speech that a 0.6% inflation rate is a “very encouraging sign of disinflation in action” and guided a dovish stance on the interest rate outlook, Reuters reported. “Policy normalization in the Euro area is probably not complete”, Villeroy said.
- Separately, ECB Governing Council member and Lithuania's central bank Governor Gediminas Šimkus has warned of downside risks to inflation in the wake of a stronger Euro (EUR) and trade frictions with the US. Šimkus sees scope for an “interest rate reduction in June”.
- Meanwhile, financial market participants have fully priced in that the ECB will reduce its Deposit Facility Rate by 25 basis points (bps) to 2% in the monetary policy meeting next week.
- Ahead of the ECB meeting, officials would also have the flash inflation data for May from Germany and its six states, Spain, and Italy on Friday, and the broader Eurozone on June 3.
Technical Analysis: EUR/USD holds key 20-day EMA
EUR/USD corrects from the month high of 1.1420, trading near 1.1350 at the time of writing on Tuesday. However, the near-term outlook of the pair remains bullish as it holds the 20-day Exponential Moving Average (EMA), which is around 1.1277.
The 14-period Relative Strength Index (RSI) struggles to break above 60.00. Bulls would come into action if the RSI breaks above that level.
Looking up, the April 11 high of 1.1475 will be the major resistance for the pair. Conversely, the September 25 high of 1.1215 will be a key support for the Euro bulls.
Euro FAQs
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%).
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.