- EUR/USD trades stronger near 1.0860 in Monday’s early Asian session.
- Fed’s key inflation gauge climbed 2.5% in June from a year ago.
- The chance of another ECB rate cut might weigh on the Euro.
The EUR/USD pair trades with mild gains around 1.0860 during the early Asian trading hours on Monday. The major pair edges higher as traders widely anticipated the September interest rate cut by the US Federal Reserve (Fed) in September, which drags the Greenback lower.
Recent US inflation, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, eased slightly from a year ago in June, paving the way for an interest rate cut by the Fed in September. The US PCE inflation continued to slow in June, slowing from a 2.6% annual gain in May to 2.5% in June. On a monthly basis, the PCE figure increased by 0.1% in June, after remaining unchanged in May. The core PCE price index, the Fed's preferred annual inflation measure, rose 2.6% YoY in June, compared to 2.5% in May, according to Commerce Department figures released Friday.
However, the softer inflation in the US for June is not enough for the Fed to start cutting interest rates at its August meeting on Wednesday. Morgan Stanley analysts noted that 'considerable progress on inflation' will allow the Fed to get closer to rate cuts, adding that they are expecting three cuts this year, beginning at the September FOMC meeting. The financial markets have priced in nearly 90% of the possibility of a Fed rate cut in September, followed by another cut in November and December, according to the CME FedWatch Tool.
On the other hand, traders see more of the European Central Bank (ECB) rate cuts in the near term. This, in turn, might weigh on the Euro (EUR) against the Greenback. The ECB left the interest rate unchanged last week, but weaker German IFO survey results and softer data are opening the door to another rate cut by the ECB. Traders will take more cues from the preliminary Gross Domestic Product (GDP) for the second quarter from Germany and the Eurozone. In the case of stronger-than-expected readings, this could lift the shared currency against the USD.
Euro FAQs
The Euro is the currency for the 20 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.
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