EUR/USD gathers strength to near 1.1200 as risk appetite rebounds

EUR/USD trades in positive territory for the second consecutive day around 1.1195 in Wednesday’s Asian session.
A larger Fed rate cut expectation drags the USD down against the Euro.
ECB policymaker signaled another interest-rate cut next month cannot be ruled out.

The EUR/USD pair extends upside to near 1.1195 on Wednesday during the Asian trading hours. The weakening of the Greenback amid rising speculation of a jumbo rate cut from the US Federal Reserve (Fed) in November provides some support to the major pair. France’s Consumer Confidence and US New Home Sales data are due on Wednesday. Also, Fed Governor Adriana Kugler is set to speak.

The bigger-than-expected cut in interest rates by the Fed drags the US Dollar (USD) lower broadly. The US central bank cut its benchmark Federal Funds Rate by half a percentage point to the 4.75% to 5% range “in light of the progress on inflation and the balance of risks.” Investors raise their bets that the Fed will cut further rate in November. According to the CME FedWatch Tool, the markets have priced in nearly 56% possibility of a second 50 bps rate cut in the November meeting, while the odds of 25 bps stands at 44%.

The improved risk appetite is likely to support the shared currency for the time being. However, the expectation of another interest-rate cut by the European Central Bank (ECB) or any signs of weakness in the Eurozone economy could cap the upside for the Euro (EUR) against the USD. The ECB governing council member Klaas Knot said on Tuesday that the central bank would continue to reduce the interest rates at least through the first half of 2025, to a level between 2% and 3%. Meanwhile, ECB policymaker Madis Muller noted another interest-rate cut next month cannot be ruled out, but reckons policymakers may lack sufficient data to make definitive judgments on the region’s struggling economy.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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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