- EUR/USD rises to near 1.1000 as the US Dollar declines on firm Fed rate-cut prospects.
- The Fed is expected to cut interest rates by 25 bps in September.
- ECB officials refrain from committing a pre-defined rate-cut path.
The EUR/USD pair rebounds to near the psychological resistance of 1.1000 in Friday’s New York session. The major currency pair bounces back as the US Dollar (USD) declines with investors gaining confidence that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 102.70. Firm speculation for Fed interest-rate cuts in September has improved appeal for risk-sensitive currencies. 10-year US Treasury yields tumble to near 3.89%.
While market participants remain confident over Fed rate cuts in September, traders pare bets supporting a 50-basis point (bps) interest-rate reduction as fears of the United States (US) entering a recession have waned after robust growth in Retail Sales in July and lower-than-expected Initial Jobless Claims for the week ending August 9.
The next trigger for the US Dollar will be Fed Chair Jerome Powell’s speech at the upcoming Jackson Hole (JH) symposium, which will be held from August 22-24. Jerome Powell is expected to provide cues for interest rate-cut path for the entire year.
Meanwhile, the appeal of the Euro (EUR) remains firm as investors expect that the European Central Bank (ECB) will reduce interest rates gradually. ECB policymakers have been refraining from committing a specific rate-cut path as they worry that price pressures could reaccelerate.
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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