EUR/USD remains steady near 1.1100, close to eight-month highs

EUR/USD reached an eight-month high of 1.1087 on Tuesday.
CME’s FedWatch Tool indicates a 76.5% chance of a 25 basis point rate cut by the Fed in September.
The Euro holds minor losses ahead of the Harmonized Index of Consumer Prices data from the European Monetary Union on Tuesday.

EUR/USD trades around 1.1080 during the Asian session on Tuesday after pulling back from an eight-month high of 1.1087. This downside is attributed to the improved US Dollar (USD) amid risk aversion sentiment. However, the Greenback may struggle due to rising odds of a 25 basis point rate cut by the US Federal Reserve (Fed) in September.

According to the CME’s FedWatch Tool, rate markets are pricing in a 23.5% chance of a 50 basis point rate cut by the Fed, while there is a 76.5% probability of a 25 basis point cut in September.

Minneapolis Fed President Neel Kashkari stated on Monday that it would be appropriate to discuss potential US interest rate cuts in September due to concerns about a weakening labor market, per Reuters.

The Jackson Hole Economic Symposium, set to begin on Thursday, will mark the start of a multi-day event featuring central bankers. All eyes are now on Fed Chair Jerome Powell's upcoming speech at Jackson Hole on Friday.

In the Eurozone, key data on business activity and consumer prices that could influence the European Central Bank's (ECB) September decision are awaited. Investors anticipate that the European Central Bank (ECB) will gradually reduce interest rates. ECB policymakers have hesitated to commit to a specific rate-cut path due to concerns that price pressures could reaccelerate.

The Harmonized Index of Consumer Prices (HICP) data from the European Monetary Union and Producer Price Index figures from Germany will be released on Tuesday. These figures may guide the ECB’s policy trajectory.

EUR/USD recently touched a slight new high just above 1.1050, reflecting broader USD losses with minimal other influences, according to Shaun Osborne, Chief FX Strategist at Scotiabank.

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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