EUR/USD posts modest gains above 1.0850, all eyes on the US presidential election results
- EUR/USD remains firmer around 1.0880 in Tuesday’s early Asian session.
- The outcome of the US presidential election and the Fed rate decision will be the highlights for this week.
- A slew of Eurozone economic data dampens the hope of large rate cuts by the ECB in December.
The EUR/USD pair trades with mild gains near 1.0880 during the early Asian session on Tuesday. The US Dollar (USD) edges lower as traders brace for the outcome of the US presidential election and a likely interest rate cut from the Federal Reserve (Fed), which supports some support for the major pair.
Democratic candidate Kamala Harris and Republican Donald Trump remain almost tied in opinion polls, and the results will be announced for days after voting ends. "The polls suggesting that Harris may have her nose in front in a couple of swing states is causing a bit of profit-taking in the Trump trade,” noted Kenneth Broux, head of corporate research FX and rates at Societe Generale.
Furthermore, the rising expectation that the Fed will cut the interest rate at its November meeting drags the Greenback lower. The US central bank is widely anticipated to cut rates by the usual 25 basis points (bps) on Thursday, rather than the outsized half-point easing of its last decision. According to CME's FedWatch tool, financial markets are now pricing in nearly a 98% odds of a quarter-point reduction and a near 80% chance of a similar-sized move in December.
Across the pond, the Euro gathers strength as the recent Eurozone economic data has diminished expectations for the European Central Bank (ECB) to lower larger interest rates in December. Money markets are currently pricing in a 34 bps rate cut, down from a 42 bps reduction the previous day, indicating that the odds of a deeper 0.5% reduction are diminishing. During the October meeting, the central bank reiterated its commitment to a "data-dependent and meeting-by-meeting" approach to future policy decisions. However, the Eurozone November inflation report might offer some hints about the ECB interest rate outlook.
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.
Recommended Articles
