EUR/USD gains as heightened concerns over US fiscal health hurt the US Dollar
- EUR/USD jumps to near 1.1350 due to weakness in the US Dollar as concerns over US fiscal imbalances persist.
- US President Trump’s new tax bill is expected to increase the nation’s debt by $3.8 trillion over a decade.
- The uncertainty over a EU-US trade deal escalates as the old continent has not offered unilateral concessions.
EUR/USD resumes its upside journey on Friday after a corrective move the previous day. The major currency pair jumps to near 1.1350 during European trading hours as the US Dollar (USD) slumps after a short-lived recovery on Thursday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near the two-week low around 99.40.
Financial market participants continue to dump the US Dollar as the new tax bill by United States (US) President Donald Trump has increased concerns over the nation’s fiscal health. The new bill comprises tax cuts and higher spending on defense and immigration controls, among others, and it is expected to increase the national debt by $3.8 trillion over the next decade, according to the nonpartisan Congressional Budget Office.
Investors are worried that the additional burden on the nation’s debt could lead to further erosion of the US credit rating. Last week, Moody’s downgraded the US sovereign credit rating by one notch to Aa1 from Aaa, citing the failure of successive administrations and Congress to agree on measures to “reverse the trend of large annual fiscal deficits and growing interest costs”.
The scenario of a long-term issuer rating downgrade could lead to an increase in borrowing rates for the government, which limits the spending capacity for future generations or makes borrowing more expensive for them.
The imposition of Trump’s new bill is also expected to accelerate consumer inflation expectations, assuming that tax cuts for households result in an increase in the overall spending and eventually boost price pressures. The scenario would discourage Federal Reserve (Fed) officials from reducing interest rates.
Fed officials have been guiding that monetary policy adjustments are not appropriate at the current juncture, as uncertainty over the economic outlook under the leadership of US President Trump is unusually high.
Daily digest market movers: EUR/USD gains at US Dollar’s expense
- EUR/USD trades firmly around 1.1350 as the US Dollar faces selling pressure. The Euro (EUR) trades firm despite uncertainty over a European Union (EU)-US bilateral deal. Earlier in the day, hopes of progress in a trade agreement between the two economies diminished after Washington’s trade negotiators warned that discussions could not advance if the old continent doesn’t offer unilateral concessions.
- A report from the Financial Times (FT) showed that US Trade Representative Jamieson Greer would tell European Commission (EC) Commissioner for Trade and Economic Security Maroš Šefčovič that the recent “explanatory note” shared by Brussels for the talks falls short of US expectations. The report states that, unlike some other trading partners, the EU has offered mutual tariff reductions, not unilateral concessions. The explanatory note also lacked any new concessions relating to the digital, as the US has demanded.
- On the economic data front, Eurozone Q1 Negotiated Wage Rates data, a key wage growth measure, has come in lower at 2.38% against 4.12% seen in the last quarter of 2024. A sharp slowdown in the wage growth measure is expected to encourage European Central Bank (ECB) officials to lower interest rates further. Traders are increasingly confident that the ECB will reduce its key borrowing rates again in the June policy meeting.
- However, ECB policymaker and Bundesbank President Joachim Nagel expressed caution on further interest rate cuts at the sidelines of the G7 meeting in Canada on Thursday. "After seven interest rate cuts, our deposit rate stands at 2.25%, a level that can certainly no longer be described as restrictive," Nagel said, Reuters reported. He stated that borrowing costs are “no longer a drag on the Eurozone economic growth”.
- The Euro underperformed on Thursday after the release of the weaker-than-projected HCOB Purchasing Managers’ Index (PMI) data for May. The PMI report showed that the overall business activity surprisingly declined as the service sector output contracted unexpectedly.
Technical Analysis: EUR/USD climbs to near 1.1350
EUR/USD jumps to near 1.1350 on Friday. The near-term outlook of the pair is bullish as it holds the 20-day Exponential Moving Average (EMA), which is around 1.1255.
The 14-period Relative Strength Index (RSI) rises to near 60.00. Bulls would come into action if the RSI breaks above that level.
Looking up, the April 28 high of 1.1425 will be the major resistance for the pair. Conversely, the psychological level of 1.1000 will be a key support for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 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%).
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.
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.
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.
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.