US data to drive Euro

The Euro started the week against the US dollar on a strong note in yesterdays trading session before pulling back towards the end of the day as market participants became wary of US economic data due for release later in the week which will determine the next interest rate move from the US Federal Reserve.

Most analysts expect the Fed to raise rates at least one more time before bringing the rate hiking cycle to an end but some have not excluded even further rises if inflation is not brought under control by heading towards the US central bank’s target rate of 2 percent.

"With the Federal Reserve seemingly intent on raising interest rates further, these two interest rate-sensitive sectors – construction and manufacturing – are likely to find things tougher as we head through the second half of 2023," says James Knightley, chief international economist at ING.

"This [services] sector faces its own challenges, however, with the restart of student loan repayments for 43 million Americans from October. At a monthly average cost of $350 per person, this works out at around $180bn in aggregate for a year and is equivalent to around 1% of consumer spending," he adds.

Data published yesterday showed Euro area manufacturing activity contracted faster than initially thought in June which doesn’t sit well for any further interest rate hikes in the Eurozone but in any case the European Central bank is set to go ahead with further rate rises.

This was confirmed by ECB President Christine Lagarde who noted that inflation is still too high, so it is premature for the central bank to declare victory over rising consumer prices.

Inflation in the countries that share the euro currency has entered a phase that could persist for months, Lagarde said, emphasising the prolonged fight against price growth that must diminish demand and force firms to curtail prices.

It is a relatively quiet day today on the economic calendar, so the EUR/USD currency pair is expected to trade in a tight range as traders await key data tomorrow such as the producer price index from the Eurozone which is a key indicator of business confidence.

The highlight of the day will be during the American session with the release of the FOMC minutes where the Fed will give an update on the state of the US economy which will include interest rate guidance moving forward.