EUR/USD maintains position above 1.0400, volumes remain light on New Year Eve

EUR/USD inches higher as the US Dollar remains under pressure due to weaker Treasury yields.
US Treasury yields declined by approximately 2% on Monday, with 2-year and 10-year yields at 4.24% and 4.53%, respectively.
The Euro struggles as the ECB continues to provide dovish guidance on its interest rate policy for the upcoming year.

EUR/USD gains ground on Tuesday, trading near 1.0410 during the Asian session after posting losses on the previous day. The EUR/USD pair's rebound can be attributed to a subdued US Dollar (USD) following weaker Treasury yields.

The US Dollar Index (DXY), which tracks the US Dollar (USD) against six major currencies, holds minor losses near 108.00 as US Treasury yields fell by approximately 2% on Monday. The 2-year and the 10-year yields stood at 4.24% and 4.53%, respectively.

However, the risk-sensitive EUR/USD pair faces challenges as the Federal Reserve (Fed) may adopt a more cautious tone regarding potential rate cuts in 2025, signaling a shift in its monetary policy approach. This adjustment comes amidst uncertainties tied to the economic strategies expected under the incoming Trump administration.

Additionally, the safe-haven outflows put pressure on the Euro amid heightened geopolitical risks stemming from the prolonged Russia-Ukraine conflict and ongoing tensions in the Middle East. Israel's ambassador to the United Nations, Danny Danon, issued a stern warning on Monday to Yemen's Iran-backed Houthi militants, urging them to cease their missile attacks on Israel, per Reuters.

The European Central Bank (ECB) maintains dovish guidance on interest rate policy for the next year, which puts downward pressure on the Euro and the EUR/USD pair. The ECB reduced its Deposit Facility rate by 100 basis points (bps) to 3% this year and is expected to lower it to 2%, which policymakers see as a neutral rate, by the end of June 2025. This suggests that the ECB will cut its key borrowing rates by 25 bps at every meeting in the first half of next year.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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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