- EUR/USD appreciates amid uncertainty over the magnitude of the next Fed rate cut.
- ECB Governing Council member Gabriel Makhlouf said the central bank continues to operate in a “highly uncertain environment.”
- Rabobank suggests that unfavorable Eurozone fundamentals will likely limit the upside potential of the EUR/USD pair.
EUR/USD starts the week on a positive note, rising to trade around 1.1090 during the Asian session on Monday. Investors are now focused on the highly anticipated US Federal Reserve (Fed) monetary policy decision later this week. Markets remain divided on whether the Fed will cut rates by 25 basis points (bps) or 50 bps.
According to the CME’s FedWatch tool, markets are anticipating a 48.0% chance of a 25 basis point (bp) rate cut by the Federal Reserve at its September meeting. The probability of a 50 bp rate cut has risen to 52.0%, up from 50.0% a day ago.
Investors will be closely watching the FOMC press conference for insights into the future of US interest rates. If Fed Chair Jerome Powell signals a more aggressive easing approach, it could put downward pressure on the US dollar, providing a potential boost to the EUR/USD pair.
European Central Bank (ECB) Governing Council member and Governor of the Central Bank of Ireland Gabriel Makhlouf said on Friday that the central bank is still operating in a “highly uncertain environment” and will rely on data to guide future monetary policy decisions. Makhlouf stressed that the ECB is not committing to a specific rate path, but remains “determined to ensure” that inflation in the Eurozone returns to the 2% target “in due course.”
Rabobank research notes indicate that the ECB announced its second rate cut of the cycle last week, with another cut anticipated before the end of the year. The latest ECB staff projections also reflect a downward revision in Eurozone growth. While expectations of Fed easing may weaken the USD, Rabobank suggests that unfavorable Eurozone fundamentals will likely limit EUR/USD upside potential in the near future.
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.
