Euro Falls as Risk Aversion Increases, Fed Policy Shifts

• EUR/USD falls as a stronger US Dollar gains from Middle East tensions and inflation, fueling Fed rate hike bets.
• US April Retail Sales rose 0.5% MoM, showing resilient consumer spending despite high borrowing costs.
• Fading US-Iran peace odds keep the Strait of Hormuz closed, driving up Eurozone inflationary pressures.

EUR/USD continues its losing streak for the fifth consecutive day, trading around 1.1650 during the Asian hours on Friday. The pair depreciates as the US Dollar (USD) advances amid surging inflation linked to ongoing Middle East tensions, which has reinforced market expectations that the Federal Reserve (Fed) will maintain high interest rates for an extended period or perhaps even implement further hikes.

US Retail Sales rose 0.5% MoM in April, in line with estimates and below March’s 1.6% print. Sales increased 4.9% YoY in the same period, exceeding estimates of 3.3% growth. This performance underscores the resilience of American consumer spending even in the face of elevated borrowing costs.

Additionally, the Greenback appreciates due to shifts within the Federal Reserve (Fed) leadership. The resignation of Stephen Miran from the Board of Governors has paved the way for Kevin Warsh to take over as Fed Chair.

The downside of the EUR/USD pair could be restrained as the Euro (EUR) may receive support as expectations for a lasting US-Iran peace deal have faded, keeping the Strait of Hormuz effectively closed and amplifying inflationary pressures in the Eurozone.

Money markets widely price in a European Central Bank (ECB) June rate hike, with three increases almost fully priced in by the end of 2026. ECB official Martins Kazaks reinforced this outlook on Thursday, stating that the central bank will need to raise borrowing costs if rising crude prices feed into inflation expectations.

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.