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The EUR/USD is the most traded forex pair. In 2022, it accounted for 23% of the daily forex trading turnover worldwide. The pair involves two of the most liquid currencies in the world. A key factor that impacts the two currencies is the interest rate differential between the eurozone and the US. Economic data is an early indicator of the health of the economy and central banks’ decisions regarding monetary tightening or easing. Experienced traders factor these data releases into their forex trading decisions to prepare for potential uptrends and downtrends.
High liquidity and trade volumes are accompanied by strong investor sentiment. Investor sentiment, in turn, is driven by interest rate decisions, the geopolitical atmosphere and global economic growth. Observing the indicators that shape these factors can offer early insights to refine your EUR/USD trading strategy. Some of the most significant economic data releases that impact the euro and US dollar are:
Gross domestic product is the primary indicator of a country’s economic health. Faster GDP growth supports the domestic currency. Although it is a lagging indicator, GDP data from the EU and the US affects investor sentiment, moving the currency pair. For instance, the US reported 3.3% GDP growth for Q4 2023 in January 2024. This emphasised the resilience of the country’s economy and that the Fed would not cut interest rates in the short term. The economic data strengthened bullish sentiment for the USD, weighing on the EUR/USD, which consequently dropped to 6-week lows at $1.08215.
Inflation reduces a currency’s purchasing power. High inflation forces central banks to raise interest rates. This supports investments, driving the domestic currency higher. Every region favours certain metrics over others to gauge inflation and make policy decisions. EUR/USD traders must stay informed about the popular inflation indicators in the eurozone and US.
CPI: The consumer price index measures inflation experienced by consumers. It measures the change in average cost borne by consumers for a basket of common goods and services. It directly impacts consumer spending patterns.
PCEPI: The personal consumption expenditure price index includes all spending done by the government, employers and non-profits on the consumer. So, CPI includes only the bills paid by consumers, while PCEPI includes spending by the government and insurance companies on the healthcare of individual citizens. Therefore, it is a broader indicator of inflation experienced by the end-user.
PPI: The producer price index assesses the change in prices from the perspective of industries, such as manufacturers, agriculturists, etc. A higher PPI usually translates into higher CPI in the long term.
The Euro Area comprises 27 countries, each with its own economy and financial planning. The euro is the common currency of 20 of these countries. The most popular inflation indicators in the region are:
HICP: The harmonised index of consumer price is a weighted aggregation of the spending on food, energy, alcohol, tobacco, non-industrial goods and services.
LIMI: Low import intensity is a relatively new inflation indicator. The indicator was developed after energy prices in the region soared, following the sanctions on Russia after it invaded Ukraine. LIMI helps identify whether the cause of the high headline inflation lies in the domestically-driven consumer markets or high import costs (imported inflation).
Employment data is an important indicator of a nation’s growth potential and economic resilience.
NFP: The US non-farm payrolls data is one of the most significant labour market updates globally. The strength or weakness of the US job market instantly impacts trader sentiment and the performance of the EUR/USD. For instance, the NFP data for August 2024, released on September 6, showed that payrolls increased by 142,000. However, this was below the market expectations of 160,000. While a positive NFP is good for the economy, a lower-than-expected figure can turn investors bearish. As a result, the EUR/USD remained under pressure throughout the trading session and closed 0.75% lower on September 6. Even the US dollar index was down 0.3% on the day. Note that the NFP impacts trading decisions across the financial markets and not just for forex.
Unemployment Rate (US): This indicator sheds light on the number of people who applied for unemployment benefits in the US in a particular month. Poor employment generation and high unemployment rates signal economic distress. This affects the disposable income of households, reducing customer spending and slowing the economy down.
Seasonally Adjusted Unemployment Rate (EU): The eurozone releases country-wise and weighted-average unemployment numbers to keep track of job gains and losses in the region. High unemployment numbers may encourage the ECB to lower interest rates and stimulate job creation. This, in turn, drives economic growth. Therefore, the 6.4% unemployment rate for July 2024 led to expectations of another rate cut by the ECB in September, which lent support to the EUR/USD.
Retail sales, manufacturing demand and real estate spending are some of the other indicators of the health of an economy that may affect the euro-US dollar forex pair.
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