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EUR/USD makes modest gains above 1.1050 as traders await US ADP report

  • EUR/USD is trading firmer near 1.1070 in the Asian session on Wednesday.
  • US ISM manufacturing PMI came in weaker than expected in September.
  • Eurozone inflation fell below the ECB’s target in September.

EUR/USD is trading with slight gains around 1.1070 during Asian trading hours on Wednesday. Meanwhile, any sign of rising geopolitical tensions in the Middle East could weigh on riskier assets like the euro (EUR). Investors will be keeping an eye on US ADP labor change data for September due later on Wednesday.

Traders are still weighing the chance of a jumbo rate cut by the US Federal Reserve (Fed) in November after Fed Chairman Jerome Powell said the US central bank was in no rush and would cut its benchmark rate “over time” . Financial markets are now pricing in a nearly 37.4% chance of a 50 basis point (bps) cut in November, while the possibility of a 25 basis point cut is 62.6%, according to CME FedWatch Tool.

Weak US economic data on Tuesday undermines the Greenback. US ISM manufacturing PMI was steady at 47.2 in September, weaker than expectations of 47.5. The report indicated a continued contraction in the US manufacturing sector.

Across the pond, eurozone inflation eased in September, falling below the European Central Bank’s (ECB) target. The harmonized index of consumer prices (HICP) rose 1.8% year-on-year in September, compared with 2.2% in August, Eurostat said on Tuesday. This figure marked the lowest figure since April 2021. The eurozone economy may not be out of the woods yet, even if September inflation rates are promising. The ECB cut interest rates to 3.50% in September and also hinted that another cut could happen in the near future.

Fears of a wider war in the Middle East could put some selling pressure on the shared currency and boost safe-haven assets such as the USD. Iran has fired more than 200 ballistic missiles at Israel, and Prime Minister Benjamin Netanyahu is vowing to retaliate against Iran for Tuesday’s missile attack.

Frequently asked questions about the euro

Euro is the currency for the 19 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 ECB’s main mandate 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 the 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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