EUR/USD holds steady below 1.1650, all eyes on Fed rate decision
- EUR/USD flat lines near 1.1625 in Wednesday’s early European session.
- Financial markets expect the Fed to make its third straight 25 bps reduction.
- Growing speculation that the ECB is done cutting interest rates could support the Euro.
The EUR/USD pair trades flat around 1.1625 during the early European session on Wednesday. Markets turn cautious ahead of the US Federal Reserve (Fed) interest rate decision later on Wednesday, in which a 25 basis points (bps) rate cut is almost fully priced in.
The Fed is expected to deliver a further interest rate cut at its December meeting, bringing levels to a range between 3.50% and 3.75%. This would be the lowest in around three years. Traders will closely watch Fed Chair Jerome Powell’s press conference, which could offer some hints about how many cuts the dot plot will lay out for next year. Any hawkish remarks from the Fed officials could boost the US Dollar (USD) and act as a headwind for the major pair in the near term.
Investors have been dialing back on expectations of rate cuts in 2026 amid lingering inflation concerns and signals of a more resilient US economy. Data released by the US Labor Department’s JOLTS report on Tuesday showed that job openings rose to 7.67 million in October, beating forecasts of 7.20 million. This upbeat jobs report contributes to the Greenback’s upside.
Across the pond, the European Central Bank (ECB) has adopted a cautious approach to monetary policy, suggesting a pause in the rate-cutting cycle for now. This, in turn, could provide some support to the shared currency against the USD. ECB President Christine Lagarde said in recent statements that the Eurozone economy is in a "good place," with inflation close to the 2% target. Lagarde emphasized that the ECB is not pre-committing to a particular rate path and will maintain a data-dependent, meeting-by-meeting approach to future decisions.
Euro FAQs
The Euro is the currency for the 20 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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