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1 May 2025
EUR/USD weakens below 1.1350 on renewed US Dollar demand
- EUR/USD softens to around 1.1325 in Thursday’s early Asian session.
- The US economy shrank 0.3% in Q1, weaker than expected.
- Inflation data from the largest nations of the Eurozone supports market expectations that the ECB could continue to cut rates.
The EUR/USD pair trades with mild losses near 1.1325 during the early Asian session on Thursday, pressured by renewed US Dollar (USD) demand. The US Dollar Index (DXY) advanced further and reached two-day highs around 99.70. Later on Thursday, the US ISM Manufacturing Purchasing Managers Index (PMI) report will be in the spotlight. Most markets will be closed on May 1 due to the Labour Day holiday.
Traders pulled back slightly from bets that the US Federal Reserve (Fed) will reduce its interest rates by a full percentage point this year after data showed the US economy contracted by an annualized 0.3% last quarter. Still, futures contracts see the Fed starting rate cuts in June, with a total of four quarter-point reductions expected, lowering the rate to the 3.25%-3.50% band by year-end.
Data released by the US Commerce Department on Thursday showed that the US economy contracted at an annualised rate of 0.3% in the first quarter (Q1) of 2025. This figure came in weaker than the 0.4% growth expected and down from the previous reading of a 2.4% expansion.
The report came ahead of the next uncertain steps for US President Donald Trump’s trade policy. On Wednesday, Trump said that the US economy will “take a while” to show the outcome of the current policies and blamed the stock market’s performance on former US President Joe Biden.
The US weekly Initial Jobless Claims are due later on Thursday, followed by the final S&P Global Manufacturing PMI and the ISM Manufacturing PMI. All eyes will be on the US Nonfarm Payrolls (NFP) report on Friday, which is expected to see 130,000 jobs added in the US economy in April. In case of a weaker-than-expected outcome, this could drag the Greenback lower and create a tailwind for EUR/USD.
Across the pond, traders have almost priced in a 25 basis points (bps) rate cut by the European Central Bank (ECB) in the June policy meeting. ECB officials have forecasted a further slowdown in inflation and economic growth in response to tariffs imposed by the US on its trade partners.
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.