EUR/USD hovers around 1.1700 ahead of ECB policy decision
- EUR/USD remains silent as traders adopt caution ahead of the ECB interest rate decision.
- The European Central Bank is expected to maintain the Main Refinancing Operations Rate at 2.15% in September.
- The US Dollar could experience weakness as softer PPI boosts Fed easing prospects for September.
EUR/USD holds ground after two days of losses, trading around 1.1700 during the Asian hours on Thursday. The pair moves little as traders adopt caution ahead of the European Central Bank (ECB) interest rate decision due later in the day.
The ECB is widely expected to keep the Main Refinancing Operations Rate unchanged at 2.15% for the second consecutive meeting in September, as trade uncertainty persists and eurozone inflation remains on target for a third month.
The EUR/USD pair may regain its ground as the US Dollar (USD) could face challenges as traders fully price in a rate cut by the US Federal Reserve (Fed) in September, following softer-than-estimated US Producer Price Index (PPI) data.
Traders now turn to the August US Consumer Price Index (CPI), due later today, which could strengthen expectations for a larger 50-basis-point Fed rate cut next week. The headline CPI is forecasted to rise by 2.9% YoY in August, while the core CPI is projected to increase 3.1% YoY during the same period.
Markets are now fully pricing in a 25 basis points (bps) rate cut at the Fed's September meeting, while the chance of a larger 50 bps reduction has also risen to nearly 12%, according to the CME FedWatch tool.
The US Bureau of Labor Statistics (BLS) reported on Wednesday that the US PPI inflation declined to 2.6% on a yearly basis in August from 3.3% in July. This figure came in below the market consensus of 3.3%. On a monthly basis, the PPI declined by 0.1% in August, compared to the 0.7% increase (revised from 0.9%) prior.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily 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 over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all 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 put up 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 economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data 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 over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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