The EUR/USD currency pair continued to experience selling pressure on Thursday as it sought the bottom, probing the 1.1200 level. Following a protracted period of whipsaws, the duo created a temporary floor just north of this important barrier. Even as it latterly finds some positive catalysts to attempt to rally, EUR/USD remains unable to maintain a solid base in the 1.1300s. This drop is part of a larger trend accelerating by the strengthening of the US Dollar and increasing US Treasury yields.
Not only is it by far the most traded in the currency pair in the world, EUR/USD represents around 30% of all currency exchanges. On Thursday, it fell to the bottom end. It lost more than two-thirds of a percent from the day’s opening offers. The retreat has sparked worries among traders regarding the performance of the Euro as economic dynamics continue to evolve.
Economic Factors Influencing EUR/USD
The Euro has become the official currency for 19 countries in the Eurozone. What’s more, it is critically at the mercy of our economic data from the big 4 euro economies (Germany, France, Italy and Spain). These countries together account for over 75% of the Eurozone economy so their economic data is key to EUR/USD valuation.
Indeed, on average the EUR/USD pair alone accounted for an astounding 31% of all foreign exchange transactions in 2022. It featured an average daily turnover in excess of $2.2 trillion. This staggering amount highlights the essential role this currency pair has in global commerce and finance. The Euro has come under even more recent pressure from the higher interest rates in the United States. All of this has led to increased pressure on its value relative to the Dollar.
Increasingly hawkish or relatively high interest rates in the Eurozone compared to its European competitors usually bolsters the Euro. The US has drawn this muscle largely by maintaining a hawkish monetary policy, relishing the resulting high yields in its Treasury market. Consequently, the scales have swung against the Dollar. This fundamental shift has left Forex traders wondering how well the Euro will hold up against the advance of the ever-strongening Greenback.
Trade Deal Implications on Market Sentiment
Recent news related to the potential US-UK trade deal has thrown even more uncertainty into the currency markets. The expected deal would ensure the UK does not face punitive “reciprocal” tariffs due to reapply on July 9th. A UK-wide broad 10% tariff across all goods imported into the US is still in the works. This unexpected move will likely create significant headwinds to market sentiment over the next few weeks.
The Trump administration’s decision to fully suspend tariffs on significant imports such as refined ethanol has influenced market dynamics. Traders are still anxiously watching these developments as they can have significant implications for either currency. The risk of escalating trade tensions and the reimposition or variation of tariffs introducing new sources of uncertainty contribute to volatility in foreign exchange markets.
As traders price in these considerations the fundamental tug of war between economic data and trade talks will be crucial for the direction of EUR/USD. The uncertainty surrounding tariff implementations and their impact on international trade could either bolster or suppress Euro value against the Dollar.
Future Outlook for EUR/USD
Going forward, forward market participants will be eyeing the next slate of economic releases from these important Eurozone economies. Any indication of economic strength would raise the Euro dramatically. This could allow it to continue its recent recovery in strengthening against the US dollar. On the flip side, continued robust US economic surprises could reinforce the Dollar’s newfound fortification.
EUR/USD’s continued fight for direction around 1.1300 is clearly a testament to persistent uncertainties in both areas. As market sentiment fluctuates amid geopolitical developments and economic data releases, traders remain vigilant for signals that may indicate a shift in momentum.