- EUR/USD holds positive ground around 1.0935 in Thursday’s Asian session.
- Dovish Fed expectations could weigh on the US Dollar in the near term.
- ECB’s Rehn said rate cuts could continue if the downward inflation trend strengthens.
The EUR/USD pair rebounds to near 1.0935, snapping the two-day losing streak during the Asian trading hours on Thursday. The softer US Dollar (USD) provides some support to the major pair. Nonetheless, the risk-off sentiment might cap the upside of EUR/USD amid the escalating geopolitical risks. Later in the day, the weekly US Initial Jobless Claims will be published.
The weaker US July employment report last week triggered the speculation of deeper interest rate cuts by the Federal Reserve (Fed) this year, which continue to undermine the Greenback. The financial markets are convinced the Fed will cut interest rates at its next meeting in September, increasing bets on a 50 basis point (bps) cut rather than 25 bps to nearly 83%, according to the FedWatch tool.
Across the pond, the European Central Bank policymaker Olli Rehn said on Wednesday that the ECB can continue cutting interest rates if there is confidence among policymakers that the inflation trend is slowing in the near future. The central bank left interest rates on hold at its July meeting. ECB President Christine Lagarde said during the coast conference the question of any move in September is wide open.
Traders will take more cues from the German Harmonized Index of Consumer Prices (HICP) for July. The HICP is estimated to remain unchanged at 2.6% YoY in July.
Meanwhile, the rising geopolitical tensions in the Middle East might drag riskier assets like the Euro (EUR). The market turns cautious after CNN reported late Wednesday that Iran and its proxies are preparing for a potential retaliation against Israel. The latest intelligence showed any response may be delayed until Thursday or Friday.
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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