Euro gains on rate expectations

The Euro continued to advance against the US dollar in yesterday’s trading session, driven by investor expectations of a 50-basis points rate hike from the European Central Bank (ECB) against predictions that the US Federal Reserve will hike rates by 25 bps at its March meeting. This will further reign in the yield difference between the 2 currencies.

Eurozone retail sales data released yesterday also benefited the Euro and showed that retail sales in the region expanded by 0.3% in January, missing analysts' expectations of a 1% increase. Still, investors cheered the positive figure, adding to the recent list of positive data from the euro area.

The expansion in eurozone retail sales comes after a significant 1.7% decline in December despite the busy holiday shopping period as consumers cut down on spending due to the high cost of living in most EU countries.

The ECB has been categorical about its desire to fight the rising core inflation in the region, even as the latest retail sales data showed that consumers spent 2.1% less on automotive fuel. At the same time, food, drinks and tobacco spending surged to 1.8%.

Another critical release from the eurozone was the Global Eurozone Construction PMI from S&P, which grew to 47.6 in February compared to 46.1 in January. The upbeat construction PMI also boosted the euro despite being still in contraction territory.

The construction PMI has to rise above 50 to enter expansion territory but seeing that the figure was rising was enough to reassure investors that the manufacturing sector is on the right track.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release of a monetary speech by US Federal reserve president Jerome Powell.

The Fed boss is expected to reiterate the US Central Bank’s stance to continue hiking rates to bring down record inflation which may prove detrimental to the fortunes of the Euro as the trading day comes to an end.