EUR/USD rises to near 1.1800 as trades expect ECB to keep rates unchanged
- EUR/USD receives support as the US Dollar struggles amid rising odds of a Fed bumper 50-basis-point rate cut in September.
- The CME FedWatch tool shows markets pricing in 10% odds of a larger 50-basis-point move at the September meeting.
- The French government collapsed after Prime Minister François Bayrou lost a confidence vote in the National Assembly.
EUR/USD extends its winning streak for the third successive session, trading around 1.1780 during the Asian hours on Tuesday. The pair appreciates as the US Dollar (USD) continues to face challenges, following last week’s weaker-than-expected August jobs data, which has bolstered expectations that the US Federal Reserve (Fed) will cut rates in September. Markets are increasingly betting on the possibility of a larger 50-basis-point move.
The CME FedWatch tool indicates a pricing in nearly 90% of a 25-basis-point (bps) rate cut by the Fed at the September policy meeting, up from 86% a week ago, with 10% odds of a potential 50 bps reduction this month. Traders will likely watch the US Nonfarm Payrolls Benchmark Revision due later in the day.
Investors are preparing for a busy week of economic data from the United States (US), highlighted by two key inflation reports that could shape the interest rate outlook. The August US Producer Price Index (PPI) is scheduled for release on Wednesday, with expectations that the headline PPI for August to rise 3.3% year-on-year, while the core measure is projected to increase 3.5% over the same period. Focus will shift toward Thursday’s Consumer Price Index (CPI).
In the Eurozone, France is grappling with a fresh political crisis after Prime Minister François Bayrou lost a confidence vote in the National Assembly. Bayrou had unexpectedly called the vote amid strong opposition to his budget plans. President Emmanuel Macron is expected to appoint a new prime minister within days, per the BBC.
Meanwhile, traders expect the European Central Bank (ECB) to keep rates unchanged for the second consecutive meeting on Thursday, supported by steady growth and inflation hovering near the target. Market participants will scrutinize the meeting for any guidance on the bank’s outlook for the rest of the year.
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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