- EUR/USD gains ground as the Fed is expected to continue its policy easing in November.
- CME’s FedWatch tool suggests a 42.9% chance of a 25 basis point rate cut and a 57.1% chance of a 50 basis point cut in November.
- Lower inflation in France and Spain has increased the likelihood of an ECB rate cut in October.
EUR/USD starts the week moving higher, trading around 1.1170 during the Asian session on Monday. This upward move is attributed to the tepid US Dollar (USD), which could be due to growing expectations that the US Federal Reserve (Fed) will continue its policy easing in November.
On Friday, the US core Personal Consumption Expenditure (PCE) Price Index for August rose 0.1% month-over-month, below market expectations for a 0.2% increase and lower than the previous increase of 0.2%. This result aligns with the Federal Reserve’s view that inflation is declining in the US economy, reinforcing the possibility of an aggressive cycle of rate cuts by the central bank. Meanwhile, core PCE on a year-on-year basis rose 2.7%, in line with expectations and slightly above the previous reading of 2.6%.
CME’s FedWatch tool indicates that markets are assigning a 42.9% probability to a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point cut increased to 57 .1%, compared to 50.4% a week ago.
St. Louis Federal Reserve President Alberto Musalem said Friday, according to the Financial Times, that the Fed should begin cutting interest rates “gradually” following a larger-than-usual half-point reduction at the meeting. of September. Musalem acknowledged the possibility that the economy could weaken more than anticipated, saying, “If that were the case, then a faster pace of rate cuts might be appropriate.”
Lower-than-expected inflation in France and Spain has increased speculation that the European Central Bank (ECB) could implement another rate cut in October. If it happens, this would be the third cut in the ECB’s ongoing policy easing cycle, which began in June. The ECB resumed rate cuts in September after keeping rates steady in July.
Additionally, traders are likely to watch a series of economic releases from Germany scheduled for Monday, including preliminary Consumer Price Index (CPI) data for September.
The Euro FAQs
The Euro is the currency of the 20 countries of the European Union that belong to the euro zone. 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 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 euro zone. 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 – tend to 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 made by the heads 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 data for the euro. If inflation rises more than expected, especially if it exceeds the 2% target set by the ECB, it is forced to raise interest rates to bring it back under control. Relatively high interest rates compared to their peers tend to 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 may 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. The economic data for the four largest economies in the eurozone (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
Another important 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 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 wishing 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.
