- EUR/USD weakens near 1.0890 during the Asian session on Tuesday.
- Fed’s Powell said the central bank will not wait until inflation hits its 2% target to cut interest rates.
- The ECB is expected to keep its key interest rate unchanged at its July meeting on Thursday.
The EUR/USD pair is trading on a weaker note around 1.0890 during the early Asian trading hours on Tuesday. Renewed demand for the US Dollar (USD) is weighing on the major pair. Traders will be keeping an eye on the US Retail Sales for June and Federal Reserve (Fed) Adriana Kugler’s speech on Tuesday. On Thursday, the European Central Bank (ECB) interest rate decision will be in focus.
Traders increased their bets that the US Federal Reserve (Fed) would cut interest rates in September. On Monday, Fed Chairman Jerome Powell said the central bank will not wait until inflation hits the 2% target to cut interest rates. “The implication of that is that if you wait until inflation is all the way down to 2%, you’ve probably waited too long, because the tightening you’re doing, or the level of tightness you have, is still having effects that will likely drive inflation below 2%,” Powell said.
Meanwhile, San Francisco Fed President Mary Daly stated that inflation is cooling in a way that reinforces confidence that it is on track for 2%. However, Daly added that more information is needed before a rate decision is made. The expectation of a Fed rate cut will likely drag the Dollar lower and create a tailwind for EUR/USD.
On the other hand, the ECB is expected to keep the main refinancing rate, the marginal lending facility interest rate and the deposit facility unchanged at 4.25%, 4.50% and 3.75%, respectively, at its July meeting on Thursday. The ECB decided to cut the interest rate for the first time since 2019 in June after nine months of keeping the rate unchanged. Analysts expect two more rate cuts to be on the table this year, in September and December.
Euro FAQs
The Euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world, behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – generally benefit the Euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the national banks of the Eurozone and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric data point for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the ECB is forced to raise interest rates to bring inflation back under control. Relatively high interest rates compared to their peers usually benefit the euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 can encourage the ECB to raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall. Economic data from the four largest Eurozone economies (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone economy.
Another important output 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 during a given period. If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
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.
