EUR/USD holds below 1.1750 ahead of German HICP release
- EUR/USD softens to near 1.1725 in Friday’s Asian session.
- The ECB left the key deposit rate unchanged at 2.0% on Thursday.
- Fed is anticipated to cut its key interest rate by 25 bps on September 17.
The EUR/USD pair loses traction to around 1.1725 during the Asian trading hours on Friday, pressured by a firmer US Dollar (USD). Nonetheless, the potential downside might be limited amid the rising bets of the US Federal Reserve (Fed) rate cut next week. The German August Harmonized Index of Consumer Prices (HICP) and the University of Michigan Consumer Sentiment Index data will be in the spotlight later on Friday.
The European Central Bank (ECB) decided to hold interest rates steady at its September policy meeting on Thursday as economic uncertainty persists in the wake of US President Donald Trump’s aggressive tariff agenda. The ECB held its rate on the so-called deposit facility at 2.0% and maintained an upbeat view on growth and inflation, dampening expectations for any further cut in borrowing costs.
Traders raise bets that the ECB is done cutting rates, which could underpin the shared currency in the near term. Money markets are currently pricing in nearly a 40% odds of one last rate reduction by next spring, less than before the rate decision, according to Reuters.
Across the pond, a surge in US Initial Jobless Claims and a modest rise in inflation kept investors zeroed in on likely Federal Reserve interest rate cuts next week and beyond. Markets have fully priced in a September reduction and now expect three Fed rate cuts this year, compared to two just weeks ago.
Fed Chair Jerome Powell and other policymakers signaled an easing monetary policy despite inflation risks related to tariffs. Dovish tone from the Fed officials could weigh on the Greenback and create a tailwind for the major pair.
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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