EUR/USD rises on Greenback weakness as PPI paves the way for Fed cuts

EUR/USD rallied on a weakening Greenback on Thursday.
US PPI inflation data failed to spark any major moves, but remained steady.
The market’s Fed-centric tilt continues unabated as the wait for rate cuts rolls on.

EUR/USD found higher ground on Thursday, rising back above the 1.1050 level as markets lean into a risk-on stance after US Producer Price Index (PPI) figures kept up market hopes for an opening volley from the Federal Reserve (Fed) next week. Markets are confident that the Fed will be kicking off a rate cutting cycle on September 16.

Forex Today: An impasse is likely ahead of the FOMC meeting

EU data remains inconsequential on Friday, and Euro traders will be taking a bit of a breather after the European Central Bank (ECB) dropped its main reference rate to 3.65% from 4.25% on Thursday. The University of Michigan’s Consumer Sentiment Index will give traders on the US side one last glimpse into how consumer’s feel about the overall US economy before wrapping up the trading week.

US PPI rose to 0.2% MoM in August, with core PPI accelerating to 0.3% MoM. Headline PPI was forecast to rise to 0.1% from the previous 0.0%, while core PPI was expected to rise to 0.2% from July’s -0.2% contraction. Despite the near-term upswing, annualized PPI inflation figures were much more attractive to investors, with YoY headline PPI easing to 1.7% from the previous period’s revised 2.1%, and ticking below the expected 1.8%. Core annualized PPI also beat the expected print, holding steady at 2.4% YoY versus the expected 2.5% uptick.

US Initial Jobless Claims also rose slightly higher for the week ended September 6, increasing to the expected 230K from the previous week’s revised 228K.

With PPI inflation remaining tame and the number of unemployment benefits seekers holding firmly in tepid territory, little lies in the way of a first rate cut from the Federal Reserve (Fed) on September 18. The Fed is broadly expected to deliver a 25 bps cut to kick off 2024’s late-starting rate cut cycle. According to the CME’s FedWatch Tool, rate markets are pricing in over 80% odds of the Fed cutting by a quarter point next week, with a slim 20% still leaning into hopes for an initial double-cut for 50 bps. Rate traders also overwhelmingly expect the Fed to deliver four cuts in total, with December’s rate call expected to land between 425 and 450 bps.

Economic Indicator

Producer Price Index ex Food & Energy (YoY)

The Producer Price Index ex Food & energy released by the Bureau of Labor statistics, Department of Labor measures the average changes in prices in primary markets of the US by producers of commodities in all states of processing. Those volatile products such as food and energy are excluded in order to capture an accurate calculation. Generally speaking, a high reading is seen as positive (or bullish) for the USD, whereas a low reading is seen as negative (or bearish).

EUR/USD price forecast

Thursday’s rally comes as welcome relief to EUR/USD bulls as the pair recovers from a mid-week plunge toward the 1.1000 handle. Despite a near-term decline from 13-month highs set in late August near 1.1200, short pressure is facing significant challenges from Fiber bidders, and the pair refuses to dip all the way back to the 50-day Exponential Moving Average (EMA) at 1.0984.

EUR/USD daily chart

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.