- EUR/USD holds key support at 1.1000 as Fed looks set to cut interest rates in September.
- Moderate growth in the US CPI in July boosted confidence that inflation remains on track to meet the bank’s 2% target.
- The ECB is expected to avoid cutting interest rates aggressively.
The EUR/USD pair is trading in a tight range above the psychological support of 1.1000 in the European session on Thursday. The major currency pair is facing mild profit-taking after hitting a fresh seven-month high at 1.1050.
However, the near-term outlook for the major pair remains firm as the Federal Reserve (Fed) is widely anticipated to reverse its restrictive monetary policy stance in September, which it has maintained since March 2022.
US (US) Consumer Price Index (CPI) data for July released on Wednesday boosted investor confidence that the Fed will cut interest rates in September as it showed price pressures are on track to return to the desired 2% rate. The annual core CPI, which excludes volatile food and energy prices and is one of the most closely watched inflation measures by Fed policymakers, rose as expected to 3.2% from 3.3% in the previous release. Over the same period, the headline CPI slowed to 2.9% from estimates and the previous release of 3%.
As the Fed rate cuts have taken centre stage, market sentiment has turned favourable for risk assets. S&P 500 futures have posted decent gains in the European session. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, remains above the weekly low of 102.27.
Meanwhile, investors are awaiting US retail sales data for July, due at 12:30 GMT. Retail sales data, a key measure of consumer spending, is estimated to have grown 0.3% after remaining flat in June.
On the Eurozone front, the Euro (EUR) remains broadly firm as investors expect the European Central Bank (ECB) to extend the policy easing cycle with a calibrated approach. ECB policymakers have refrained from committing to a predefined rate cut path to avoid risks of re-acceleration in price pressures.
US Dollar FAQs
The United States Dollar (USD) is the official currency of the United States of America, and the de facto currency of a significant number of other countries where it is in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the dollar.
In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
