EUR/USD depreciates to near 1.0500 as US Dollar strengthens, supported by rising yields
- EUR/USD slips as the DXY climbs toward 106.50, driven by rising US yields.
- The US Dollar faced headwinds due to weakening US consumer confidence.
- The Euro found support from growing optimism following reports that Germany considers a €200 billion emergency defense fund.
EUR/USD retraces its recent gains registered in the previous session, trading around 1.0500 during the Asian hours on Wednesday. The currency pair loses ground as the US Dollar (USD) appreciates amid improving US Treasury yields.
The US Dollar Index (DXY), which measures the USD against six major currencies, rises to near 106.50 with 2-year and 10-year yields on US Treasury bonds improving to 4.12% and 4.32%, respectively, at the time of writing.
However, weakening US economic data put pressure on the Greenback. The Conference Board’s consumer confidence index fell by 7 points in February to 98.3, marking its third consecutive decline, according to data released on Tuesday.
Meanwhile, Federal Reserve (Fed) Bank of Richmond President Thomas Barkin predicted another drop in Personal Consumption Expenditure (PCE) inflation later this week, highlighting the Fed’s significant progress in controlling inflation. Despite his generally optimistic outlook, Barkin emphasized the need for a "wait and see" approach amid ongoing policy uncertainty.
The EUR/USD pair gained traction as the Euro found support from growing optimism around increased fiscal spending in Germany, following reports that Europe’s largest economy is considering a €200 billion emergency defense fund.
Adding to the bullish sentiment, Frederich Merz, leader of the Christian Democratic Union (CDU) and Germany’s soon-to-be chancellor, has not ruled out the possibility of reforming the debt brake to finance key initiatives such as tax relief, lower energy prices, and a significant boost in military spending.
Meanwhile, investors closely monitored remarks from European Central Bank (ECB) officials ahead of next week’s policy meeting, where the ECB is widely expected to cut interest rates for the fifth time in a row. ECB policymaker Joachim Nagel suggested that further rate cuts remain possible if inflation continues to ease toward the 2% target. However, his colleague Isabel Schnabel cautioned that the ECB may be approaching a point where it needs to pause or halt rate reductions.
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.