EUR/USD strives to gain ground near 1.1770 on improving Fed dovish prospects
- EUR/USD attracts slight bids near 1.1770 as the US Dollar struggles to extend its rally.
- An increase in Fed dovish expectations has restricted the US Dollar’s rally.
- The ECB held interest rates steady in the policy meeting on Thursday.
The EUR/USD pair attempts to regain ground near 1.1770 during the Asian trading session on Friday. The major currency pair attracts slight bids as the US Dollar ticks down amid an improvement in speculation that the Federal Reserve (Fed) could cut interest rates in the March policy meeting
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% lower to near 97.85. Still the DXY is close to its weekly high of 97.98 posted on Thursday.
The odds of the Fed reducing interest rates by 25 basis points (bps) to 3.25%-3.50% in the March policy meeting have increased to 22.7% from 9.4% seen on Wednesday, according to the CME FedWatch tool.
Fed dovish projections have accelerated, following the release of job market-related economic data this week, which pointed to soft labor demand. The US JOLTS Job Openings data for December showed on Thursday that employers posted 6.542 million fresh jobs, significantly lower than estimates of 7.2 million and the previous reading of 6.928 million.
On Wednesday, the ADP reported that the private sector created 22K jobs in January, lower than 37K in December.
Meanwhile, the Euro (EUR) is broadly under pressure even as the European Central Bank (ECB) has shrugged off the recent dip in the Eurozone inflation in the policy meeting on Thursday, where it left interest rates steady, as expected. In the updated assessment, the ECB reconfirmed that inflation should stabilise at its 2% target in the medium term and warned of an uncertain geopolitical environment.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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