EUR/USD steadies as Fed rate cut bets firm amidst US labor market concerns
- EUR/USD is up 0.18% weekly as markets fully price a September 25-bps Fed cut.
- Weak sentiment, payrolls revision and rising jobless claims signal US labor market deterioration ahead of FOMC.
- ECB holds rates with a data-dependent stance as US policy uncertainty and the Fed independence saga fuel volatility.
EUR/USD remains steady during the North American session on Friday, poised to end the week with modest gains of over 0.18% as traders brace for the next week’s monetary policy decision by the Federal Reserve (Fed). At the time of writing, the pair trades at 1.1736, virtually unchanged.
Euro ends week modestly higher as soft US data cements rate cut bets, narrowing policy divergence with ECB
US economic data continued to drive price action on Friday as Consumer Sentiment in September deteriorated, while inflation expectations remain above the Fed’s 2% goal. This, and the payrolls revision on Tuesday and higher than foreseen Initial Jobless Claims report, would be the reasons behind the first rate cut by the Fed in nine months.
Market participants have fully priced in a 25-basis-point rate cut at the September 16-17 meeting. Across the pond, the European Central Bank (ECB) held rates unchanged, adopting a meeting-by-meeting and data-dependent approach, while not pre-committing to a set path on interest rates.
Given the backdrop, the EUR/USD bias is tilted to the upside as the interest rate differential between the US and Europe will trim. The divergence between both central banks and the deterioration of the labor market in the US could prompt investors to buy the shared currency, also as a haven.
Breaking news revealed that a DC Circuit laid out a briefing schedule for this weekend, to determine whether Governor Lisa Cook can remain at the Fed, while challenging Trump’s attempt at removal, revealed Wall Street Journal reporter Nick Timiraos.
Next week, the US economic docket will feature the FOMC meeting and Retail Sales. In Europe, investors will eye ECB speeches, Eurozone Industrial Production and the ZEW Survey for the bloc.
Daily market movers: EUR/USD gains capped as Americans grew pessimistic on the economy
- The UoM Consumer Sentiment poll showed that Americans are growing less optimistic about the economy, as the Consumer Sentiment Index dipped from 58.2 to 55.4. Inflation expectations for one year were unchanged at 4.8%, while for five years rose from 3.5% to 3.9%.
- ECB’s President Christine Lagarde said that the disinflationary process is over, added that policy is in a good place and that the decision of holding rates was unanimous. Furthermore, she commented that trade uncertainty has diminished and that risks to economic growth are tilted to the downside.
- The US Dollar Index (DXY), which measures the greenback against a basket of six peers, is up 0.15% at 97.64.
- Fitch Ratings Agency expects two 25 bps rate cuts, each in September and December, with three more reductions penciled in 2026. Conversely, the ratings agency does not project any rate cuts by the European Central Bank again.
- After the data, traders had priced in a 90% chance of the Fed easing policy by 25 basis points (bps) and a 10% chance for a 50-bps cut, according to Prime Market Terminal interest rate probability tool. The ECB is likely to keep rates unchanged, with a 93% probability, and only a 7% chance of a 25-bps cut.
Technical outlook: EUR/USD steady at around 1.1730
EUR/USD remained steady on Friday, with buyers unable to drive the exchange rate higher after forming a ‘bullish engulfing’ chart pattern on Thursday. The Relative Strength Index (RSI) turned flat, an indication that neither buyers nor sellers were interested in opening fresh positions.
If EUR/USD ends on a daily basis above 1.1750, this clears the path to challenge 1.1800 and the year-to-date high at 1.1829. Otherwise, if the pair slumps below 1.1700, the first support would be the 20-day SMA at 1.1677 and the 50-day SMA at 1.1658.
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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