- EUR/USD struggles near a multi-week low and is pressured by a combination of factors.
- The ECB’s dovish outlook is seen as weakening for the shared currency amid a bullish USD.
- Expectations that the Fed will take a cautious stance and rising US bond yields support the Dollar.
The EUR/USD pair remains depressed during the Asian session on Friday and hits a nearly three-week low around the 1.0455 area in the last hour. Furthermore, the fundamental background suggests that the path of least resistance for spot prices is downward and supports the prospects for an extension of the recent downtrend.
The shared currency remains weakened by the dovish bias of the European Central Bank (ECB) and concerns about the weakened Eurozone economy. In fact, the ECB cut interest rates for the fourth time this year on Thursday and left the door open for more easing in 2025. This marks a big divergence compared to expectations of a less dovish Federal Reserve (Fed) and validates the negative outlook for the EUR/USD pair.
The release of the US Consumer Price Index (CPI) and Producer Price Index (PPI) this week indicated that progress in reducing inflation to the Fed’s 2% target has virtually stalled . Furthermore, growing market conviction that US President Donald Trump’s expansionary policies will increase inflationary pressures suggests that the Fed will take a more cautious stance on lowering interest rates in the future.
The outlook continues to support a further rise in US Treasury yields and helps the US Dollar (USD) preserve its gains recorded over the past week or so, to a new monthly high touched on Thursday. In addition to this, lingering geopolitical risks arising from the Russia-Ukraine war and tensions in the Middle East, along with fears of a trade war, are underpinning the safe-haven dollar and putting downward pressure on the EUR/USD pair. .
Traders, however, appear reluctant to place aggressive bets and could choose to move to the sidelines ahead of the FOMC’s crucial two-day monetary policy meeting next week. The outcome will be watched for new clues on the Fed’s rate cut path, which, in turn, should determine the near-term path of the Dollar and the EUR/USD pair. However, the fundamental background mentioned above seems to be leaning in favor of the bears.
The Euro FAQs
The Euro is the currency of the 19 countries of the European Union 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 turnover of more than $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), headquartered in Frankfurt, Germany, is the reserve bank of the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main tool is the increase or decrease in interest rates. Relatively high interest rates (or the expectation of higher rates) tend to benefit the euro and vice versa. The Governing Council of the ECB makes decisions on monetary policy at meetings held eight times a year. Decisions are made by the directors of the Eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are an important econometric indicator for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts tend to benefit the euro, making the region more attractive as a place for global investors to park their money.
The published data measures the health of the economy and may have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence 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 may encourage the ECB to raise 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 eurozone economies (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
Another important data that is published about 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 in-demand export products, its currency will gain value simply from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of 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.
