Germany records 2.0% fall in retail sales in September versus 0.4% expected

A 2.0% month-on-month (MoM) fall in German Retail Sales in September came as a downside surprise, with forecasts having pointed to a 0.4% increase. The official figures from Destatis provide a key gauge of consumer spending. August’s Retail Sales reading stood at 1.2%, revised from 1.3%.

Euro Questions Answered

The Euro Ranks Second in Global Currency Trading

Used by the 20 European Union countries that make up the Eurozone, the Euro is the world’s second most actively traded currency after the US Dollar. Its share of all foreign exchange transactions reached 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most actively traded currency pair. Next are EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

ECB Interest Rate Decisions Influence the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and conducting monetary policy. Maintaining price stability is its central mandate, whether through containing inflation or supporting growth. Changes to interest rates are its main policy instrument. The Euro generally benefits when rates are relatively high, or when higher rates are anticipated; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation Readings Shape the Euro’s Interest Rate Outlook

Measured by the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An unexpectedly strong rise in inflation, particularly above the ECB’s 2% target, requires the central bank to increase interest rates to bring price pressures back under control. By making the region a more appealing destination for global investors’ funds, interest rates that are relatively high compared with those elsewhere generally support the Euro.

Economic Releases Help Steer the Euro

The Euro can respond to data releases that indicate the economy’s health. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys are among the indicators capable of shaping the single currency’s direction. Economic strength supports the Euro by drawing in additional foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular attention is paid to figures from Germany, France, Italy and Spain. Together, these four largest euro area economies represent 75% of the Eurozone’s economy.

Trade Surpluses Support the Euro While Deficits Weigh

The Trade Balance is another important release for the Euro, recording the gap between a country’s export earnings and its spending on imports during a specified period. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to purchase those goods, thereby lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.

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