Euro pares gains against US Dollar but eyes fourth weekly advance
- EUR/USD reverses its intraday advance as the US Dollar finds some stability near three-month lows.
- The broader backdrop stays challenging for the US Dollar amid fiscal and policy concerns.
- The pair remains on course for a fourth straight weekly advance.
EUR/USD reverses its earlier gains on Friday as the US Dollar (USD) steadies after retesting the three-month low touched the previous day. At the time of writing, the pair trades around 1.1677, easing from an intraday high of 1.1711, its highest level since May 14.
Traders also digest preliminary S&P Global Purchasing Managers' Index (PMI) data showing that US business activity remained in expansion in August. The Composite PMI rose to a 52-month high of 56.0 from 54.5, while the Services PMI climbed to a 20-month high of 56.8 from 54.6. The Manufacturing PMI eased to a five-month low of 53.2 from 53.9.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 98.82, recovering from an intraday low of 98.56. Despite the intraday pullback, EUR/USD remains on track for a fourth consecutive weekly gain as the broader macroeconomic backdrop leans against the Greenback.
The US Dollar came under heavy selling pressure earlier this week after the US Treasury announced that it would double its liquidity-support buybacks for longer-dated government securities. The move raised fresh concerns about US fiscal credibility and the sustainability of rising government debt.
Fading expectations of a Federal Reserve (Fed) interest-rate hike also keep US Dollar bulls at bay. The CME FedWatch Tool shows a 65% probability that the central bank will leave interest rates unchanged next month following softer US employment and inflation data for July. However, heightened energy-driven inflation risks stemming from the US-Iran stalemate keep the possibility of a rate hike alive.
Meanwhile, the monetary policy outlook favours the Euro (EUR), with markets widely expecting the European Central Bank (ECB) to raise interest rates in September
BNY Mellon’s Geoff Yu highlights comments from ECB Governing Council member Martins Kazaks, who said the central bank remains “well positioned to tighten policy further if needed,” with Euro area inflation “still near 3% and therefore above target.” Kazaks underscored that “September’s decision remains data dependent,” even as markets have largely priced in “another 25bp hike after June’s move.”
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Recommended Articles
