EUR/USD Stable Below 1.0900 Awaiting US Retail Sales Data

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In the lead-up to the release of US Retail Sales data, the EUR/USD currency pair is holding its ground below the 1.0900 mark. During Asian trading hours, EUR/USD remained relatively stable around 1.0880. The US Dollar, while showing firmness ahead of Monday’s Retail Sales release, faced some downward pressure. This came after the University of Michigan’s preliminary Consumer Sentiment Index for March dropped to 57.9 on Friday, the lowest since November 2022 and well below both the previous reading of 64.7 and the consensus estimate of 63.1.

Market Expectations for the Federal Reserve

Markets are widely expecting the Federal Reserve (Fed) to maintain its current policy stance when it wraps up its two – day meeting on Wednesday. According to the CME FedWatch tool, traders have factored in nearly a 75% probability of a quarter – point rate cut by June. This anticipation is influencing the overall market sentiment and, in turn, has an impact on the EUR/USD pair.

Positive Influences on EUR/USD from Geopolitical Developments

The EUR/USD pair might receive support from an improving risk sentiment. Reports suggest that there could be a potential ceasefire discussion between US President Donald Trump and Russian President Vladimir Putin this week. Steve Witkoff, Trump’s envoy, stated on Sunday that he anticipates the two leaders to have a conversation. He also mentioned that Putin “accepts the philosophy” of Trump’s ceasefire and peace terms, as reported by The Guardian. Last week, the US and Ukraine proposed a 30 – day ceasefire to Russia, with Putin expressing support for the initiative. This geopolitical development has the potential to boost the Euro against the US Dollar.

Euro’s Strengthening Due to Domestic Policy Decisions

The Euro has strengthened following the news that Germany reached an agreement on debt overhaul and a significant increase in state spending. Friedrich Merz, the incoming chancellor, reached a deal with the Green and Social Democrat parties on Friday. This agreement is ahead of a crucial parliamentary vote on Tuesday regarding borrowing rule reforms. If the proposal secures a two – thirds majority, the increased spending plan could give a substantial boost to the EUR/USD pair.

Diverging Views from European Central Bank Officials

European Central Bank (ECB) Vice President Luis de Guindos expressed concerns on Sunday. He stated that President Trump’s policies are creating more economic uncertainty than during the COVID – 19 crisis, as reported by Bloomberg. Guindos pointed out that the new US administration seems less inclined towards multilateralism, which is a significant source of instability. On the other hand, ECB Governing Council member and Banque de France Governor François Villeroy de Galhau emphasized the need for the Euro to play a more prominent role globally. In an interview over the weekend, Galhau called for the creation of a “powerful savings and investment union” to attract international investors to the Euro.

Understanding the Euro and Its Influencing Factors

The Euro is the currency used by 19 European Union countries within the Eurozone. It holds the second – place position as the most heavily traded currency globally, trailing only the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion. The EUR/USD currency pair is the most actively traded in the world, estimated to account for about 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the reserve bank for the Eurozone. The ECB is responsible for setting interest rates and managing monetary policy. Its main objective is to maintain price stability, which involves either curbing inflation or stimulating economic growth. The primary tool at its disposal is adjusting interest rates. Generally, relatively high interest rates, or the expectation of such, are beneficial for the Euro, and vice versa. The ECB Governing Council makes monetary policy decisions at eight meetings held throughout the year. These decisions are made by the heads of Eurozone national banks and six permanent members, including ECB President Christine Lagarde.

Inflation data in the Eurozone, measured by the Harmonized Index of Consumer Prices (HICP), is a crucial economic metric for the Euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the ECB is likely to raise interest rates to bring it under control. Higher interest rates compared to other major economies make the Eurozone a more attractive destination for global investors, thus usually benefiting the Euro.

Economic data releases act as a barometer for the health of the economy and can significantly impact the Euro. Indicators such as GDP, Manufacturing and Services Purchasing Managers’ Indices (PMIs), employment figures, and consumer sentiment surveys all play a role in determining the direction of the single currency. A robust economy not only attracts more foreign investment but may also prompt the ECB to raise interest rates, directly strengthening the Euro. Conversely, weak economic data is likely to cause the Euro to decline. Economic data from the four largest economies in the euro area – Germany, France, Italy, and Spain – is particularly important, as they account for 75% of the Eurozone’s economy.

The Trade Balance is another important data release for the Euro. This indicator measures the difference between a country’s export earnings and import expenditures over a specific period. If a country’s exports are highly sought – after, the increased demand from foreign buyers will drive up the value of its currency. Consequently, a positive net Trade Balance strengthens a currency, while a negative balance weakens it.

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