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EUR/USD dips below 1.1150 as traders brace for US retail sales data

  • EUR/USD is losing traction around 1.1125 in the Asian session on Tuesday.
  • Investors are raising their speculation about a significant Fed rate cut at its September meeting on Wednesday.
  • Eurozone HICP inflation data will be released on Wednesday.

EUR/USD is trading on a weaker note near 1.1125 amid a modest recovery in the US dollar (USD) during Asian trading hours on Tuesday. Traders are gearing up for the release of US retail sales data due later in the day. On Wednesday, the US Federal Reserve’s (Fed) interest rate decision will take center stage.

The Fed’s two-day meeting is scheduled for Tuesday and Wednesday. Markets will monitor whether the US central bank will implement a 50 basis point (bps) rate cut or stick with a 25 basis point cut at its September meeting. Traders are raising their bets that the Fed will cut a jumbo rate on Wednesday, pricing in a nearly 67 percent chance of a 50 bps cut, up from 50 percent on Friday, according to the CME FedWatch Tool. Aggressive rate cut from the Fed could stress the greenback and act as a tailwind for EUR/USD.

The European Central Bank (ECB) decided to cut its interest rates last week, marking the second deposit rate cut this year. Martins Kazaks, a member of the ECB’s Governing Council, said on Monday that the central bank will continue to ease monetary policy, although it should not do so too quickly due to persistent inflation risks. Meanwhile, ECB policymaker Gabriel Makhlouf said on Friday that the central bank will remain data-dependent when it comes to making future monetary policy decisions.

Investors are waiting for eurozone harmonized index of consumer prices (HICP) data for further impetus. Headline inflation is expected to be unchanged annually in August. If the reading shows a hotter-than-expected result, this could lift the euro (EUR) against the USD.

Frequently asked questions about the euro

Euro is the currency for the 20 countries of the European Union that belong to the Eurozone. It is the second most heavily traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, representing an estimated discount of 30% on all trades, 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 ECB sets interest rates and manages monetary policy. The main mandate of the ECB is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is raising or lowering interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of national banks in the euro area and six permanent members, including ECB President Christine Lagarde.

Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric element for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its peers will typically benefit the euro as it makes the region more attractive as a place for global investors to park their money.

Data releases measure the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and services PMI, 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, it may encourage the ECB to raise 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 particularly significant as they account for 75% of the euro area economy.

Another important piece of information 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 in a given period. If a country produces highly sought-after exports, then its currency will only gain in value from the additional demand created by foreign buyers wanting to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

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