EUR/USD gathers strength above 1.0450 as conservatives win German election
- EUR/USD edges higher to 1.0480 in Monday’s early Asian session, up 0.18% on the day.
- Germany’s conservatives won the election, AfD leaped to second place, exit polls showed.
- US February PMI data came in weaker than expected, weighing on the US Dollar.
The EUR/USD pair attracts some buyers to near 1.0480 during the early Asian session on Monday. The Euro edges higher as Germany's conservatives won its election as expected. Traders brace for further results from the German election.
Exit polls showed Germany’s opposition conservatives Christian Democratic Union (CDU) and its allied Christian Social Union (CSU) secured the largest share of votes in the German federal election on Sunday. This put leader Friedrich Merz on track to be the next chancellor, with the far-right Alternative for Germany (AfD) coming in second. The attention now is how soon the conservative Christian Democrats could form a coalition government to offer much-needed reform to a struggling economy.
According to ZDF exit polls, the conservative CDU/CSU bloc won 28.5% of the vote, followed by the far-right Alternative for Germany (AfD) with 20% and Scholz's Social Democratic Party with 16.5%.
The weaker US economic data drags the Greenback lower. Data released by S&P Global on Friday showed that the US business activity dropped to a 17-month low in February. The latest flash estimate showed the US S&P Global Composite PMI declined to 50.4 in February from 52.7 in January. Meanwhile, the Manufacturing PMI rose from 51.2 to 51.6 during the same reported period. The Services PMI dropped from 52.9 in January to 49.7 in February, signaling a loss of momentum in the services sector.
On the other hand, concerns about the US economy and new tariff threats from US President Donald Trump cast a cloud over world markets. This, in turn, might boost the US Dollar (USD) and create a headwind for EUR/USD.
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.