- EUR/USD loses traction around 1.1125 in Tuesday’s Asian session.
- Investors raise their speculation about the Fed's significant rate reduction at its September meeting on Wednesday.
- Eurozone HICP inflation data will be released on Wednesday.
The EUR/USD pair trades on a softer note near 1.1125 amid the modest recovery in US Dollar (USD) during the Asian trading hours on Tuesday. Traders brace for the release of US Retail Sales data, which is due later in the day. On Wednesday, the US Federal Reserve (Fed) interest rate decision will take center stage.
The two-day Fed meeting is scheduled for Tuesday and Wednesday. The markets will monitor whether the US central bank will implement a 50 basis points (bps) cut or stick to a 25 bps cut at its September meeting. Traders raise their bets that the Fed will cut a jumbo rate on Wednesday, pricing in a nearly 67% possibility of a reduction of 50 bps, up from 50% on Friday, according to the CME FedWatch Tool. The aggressive rate reduction from the Fed might underline the Greenback and act as a tailwind for EUR/USD.
The European Central Bank (ECB) decided to lower its interest rates last week, marking its second reduction in the deposit rate this year. ECB Governing Council member Martins Kazaks said on Monday that the central bank will ease monetary policy further, though it shouldn’t do so too hastily due to lingering inflation risks. Meanwhile, ECB policymaker Gabriel Makhlouf stated on Friday that the central bank will remain data-dependent when it comes to making future monetary policy decisions.
Investors await the Eurozone Harmonized Index of Consumer Prices (HICP) data for fresh impetus. The headline inflation is estimated to remain unchanged on a yearly basis in August. If the reading shows a hotter-than-expected outcome, this could lift the Euro (EUR) 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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