EUR/USD: Weaker as ECB Rate Hike in Question as Euro Zone Growth Falters

EUR/USD Highlights

• Euro falls due to mixed growth and inflation data
• Euro zone GDP only expanded 0.1% in Q1
• Traders bet on smaller ECB rate hike due to mixed inflation data

EUR/USD Overview

Despite remaining close to its recent one-year high, the Euro fell on Friday due to mixed economic data concerning growth and inflation across the euro zone. The uncertainty surrounding the size of the expected interest rate hike by the European Central Bank (ECB) next week contributed to this decline.

At 13:37 GMT, the EUR/USD is trading 1.1004, down 0.0025 or -0.23%. The Invesco CurrencyShares Euro Trust ETF (FXE) is at $101.64, down $0.20 or -0.20%.

Euro Zone GDP Growth Stalls

Preliminary data revealed that the euro zone’s gross domestic product (GDP) had only expanded by 0.1% in the first quarter, below the 0.2% forecasted in a Reuters poll. While the Spanish and Italian economies expanded more than expected due to a rebound in trade, the two largest economies in the euro zone, Germany and France, stagnated or barely grew. This divergence created further difficulties for the ECB’s task.

Traders Bet on Smaller ECB Hike

Additionally, a flood of inflation data releases was mixed, leading traders to increase their bets that the ECB would only hike by 25 basis points (bps) rather than 50 bps next week.

This caused the U.S. dollar to rise broadly, supported by still-sticky inflation in the United States, reinforcing expectations for a 25-bps rate hike at next week’s FOMC meeting. Despite expectations for a Fed hike, it is expected to remain on hold for the remainder of the year due to sticky inflation, dashing hopes of a policy pivot in the second half.

Dollar Rises on Sticky Inflation

EUR/USD gains were also capped on Friday after data showed U.S. inflation grew in March, though at a slower pace, keeping the Federal Reserve still firmly on track to raise interest rates at next week’s monetary policy meeting.

Technical Analysis

The EUR/USD currency pair is currently hovering around the key R1 level at 1.1009. This level is expected to determine its short-term direction. A sustained move above this level with sufficient momentum could lead to buyers pushing the pair towards the April high at 1.1095, followed by a challenge of R2 at 1.1177. Traders are closely monitoring the price action around this level to gauge market sentiment and potential price movements.

On the other hand, breaching the 1.1009 level downwards would indicate a return of sellers, which could trigger a near-term correction. As a result, market participants are keeping a watchful eye on how the Euro responds to this critical level. Understanding the behavior of the currency pair around 1.1009 is expected to provide crucial insights into the market sentiment and the likely short-term direction of the common currency.

For a look at all of today’s economic events, check out our economic calendar.