Above 1.1200: Euro pares gains as France remains in focus

1.1220 is the latest area for EUR/USD. The pair has slipped after Tuesday’s advance stalled just above 1.1260.
Political uncertainty and debt concerns in France keep investors reluctant to take sizeable Euro positions.
Uncertainty over the extent of the Fed’s tightening cycle continues to leave the US Dollar under pressure.

EUR/USD is trading at 1.1220. On Wednesday, the Euro (EUR) is edging down against the US Dollar (USD), surrendering part of its gains from recent days after Tuesday’s rally stalled just above 1.1260. Unrest in France is unsettling investors as the country’s borrowing costs continue to rise.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Violence during student protests last weekend forced the French government to introduce partial curfews in several cities this week. The demonstrations had spread across the country over recent weeks before turning violent, with images of looting and destruction broadcast worldwide.

4.98% French yield hampers Euro recovery

A 24-year high of 4.98% in the 10-year French OAT yield underscores the continuing rise in France’s debt premium. Against the German Bund, considered the safer asset, the yield spread has widened to 157 basis points. This measure of France’s risk premium is at its highest since the 2009-2011 financial crisis.

Further losses in the pair are being limited by support for the Euro from a weak US Dollar. With no major US macroeconomic releases to provide direction, the Dollar lacks momentum. Investors are preparing for a Federal Reserve (Fed) pause next week while assessing how far the monetary tightening cycle will extend.

ING: AI concerns and changing Fed Oil response pressure Dollar

A combination of lingering AI concerns and the unwinding of crowded positions is weighing on the Dollar, according to ING analysts. They say it “continues to trade with a soft undertone,” citing “a mix of some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound.”

Energy-market moves are also prompting a different currency response, ING suggests, noting that “the dollar’s reaction function to Oil may have changed over the past week or so.” The analysts argue that “rising concerns about tech stocks have somewhat dented the market’s hawkish conviction on the Fed, allowing for greater dovish flexibility at the front end in response to non-data inputs like an oil selloff,” a development that is adding to the Dollar’s weakness.

Euro: Key Questions

The Euro at a glance

The 20 European Union countries within the Eurozone use the Euro as their currency. Only the US Dollar is traded more heavily worldwide. In 2022, the Euro featured in 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most actively traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The ECB’s role in the Euro’s performance

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and directing monetary policy. Price stability is the ECB’s central mandate, requiring it either to contain inflation or to stimulate growth. Interest-rate increases and cuts are its main policy instrument. Higher relative rates, or expectations of increases, generally support the Euro; the reverse also applies. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation data and the Euro’s value

Measured through the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. A larger-than-expected rise in inflation, particularly above the ECB’s 2% target, requires the central bank to increase interest rates to restore control over prices. By making the region a more attractive destination for global investors’ funds, interest rates that are higher than those of its counterparts generally support the Euro.

Economic indicators and the Euro’s direction

The Euro can respond to economic releases because they indicate the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can each affect the single currency’s direction. Economic strength supports the Euro by drawing in foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic figures, by contrast, are likely to weigh on the Euro. Particular attention is paid to data from Germany, France, Italy and Spain. As the euro area’s four largest economies, together they represent 75% of the Eurozone economy.

The Trade Balance’s effect on the Euro

The Trade Balance is another important release for the Euro, recording the gap between a country’s export earnings and its import spending over a specified period. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.

Above 1.1200: Euro pares gains as France remains in focus

4.98% French yield hampers Euro recovery

ING: AI concerns and changing Fed Oil response pressure Dollar