Euro advances as US Dollar declines ahead of Fed policy decision
- EUR/USD climbs as the US Dollar weakens ahead of the Fed's anticipated interest rate hold.
- Traders price in an unusually high 30.5% chance of an immediate rate hike, signaling rare policy uncertainty.
- The ECB is expected to deliver a rate hike in September.
EUR/USD holds ground for the second successive day, trading around 1.1390 during the Asian hours on Wednesday. The US Dollar (USD) struggles against the Euro (EUR) as investors are closely monitoring the Federal Reserve’s (Fed) upcoming policy decision, where the central bank is widely expected to leave interest rates unchanged.
Traders are currently pricing in a 30.5% chance of an immediate rate hike, an unusually high level of uncertainty so close to a policy announcement. Looking further ahead, markets are also factoring in a 76.6% probability of a rate increase in September, reinforcing expectations that borrowing costs could remain elevated for longer.
The US Dollar (USD) may find support amid renewed hostilities in the Middle East, which have reignited geopolitical tensions, keeping investor focus firmly on inflationary risks and the broader interest rate outlook in the United States (US).
Geopolitical risk escalated sharply after the IRGC launched a surprise ballistic missile strike targeting a US military base in Jordan at approximately 5:45 PM ET. US Central Command reported that defense systems successfully intercepted all incoming missiles, preventing casualties and structural damage. Believed to be a direct countermeasure to recent US strikes against Iranian naval assets, the incident triggered immediate retaliation; CENTCOM subsequently executed precision airstrikes in Iraq aimed at neutralizing Iran-backed groups planning operations against US forces and Saudi energy infrastructure.
The European Central Bank (ECB) unanimously kept interest rates on hold at 2.25% on July 23, but strongly signaled a September rate hike. Leadership revealed that several Governing Council members pushed for an immediate increase, warning that sustained high energy prices risk driving up broader inflation through second-round effects.
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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