EUR/USD steadies around 1.1650 amid Fed rate cut expectations, ECB policy pause
- EUR/USD may regain its ground as traders widely expect the Fed to deliver a 25 basis point rate cut in September.
- Trump has nominated Stephen Miran to replace Adriana Kugler on the Federal Reserve Board of Governors.
- The Euro may receive support as the ECB is expected to pause easing cycle at September meeting.
EUR/USD remains steady after registering gains in the previous three successive sessions, trading around 1.1660 during the Asian hours on Friday. The pair may regain its ground as the US Dollar (USD) could struggle as markets are pricing in nearly a 93% possibility of a 25 basis point (bps) cut at the September meeting, up from 48% a week ago, according to the CME FedWatch tool.
The expectations for Fed rate cut in September is boosted as new applications for unemployment insurance in the United States (US) increased, following the July US Nonfarm Payrolls (NFP) report pointed to a cooling labor market.
US Initial Jobless Claims showed that the number of US citizens submitting new applications for unemployment insurance increased to 226K for the week ending August 2. This figure came in above the market consensus of 221K and was higher than the previous week’s 218K.
US President Donald Trump has nominated Stephen Miran, chair of the Council of Economic Advisors, to succeed Adriana Kugler on the Federal Reserve Board of Governors. Traders will also keep their eyes on Trump’s plans to replace Fed Chair Powell. Fed Governor Christopher Waller is emerging as a top candidate to serve as the central bank’s chair among Trump’s advisers, per Bloomberg.
The Euro (EUR) may continue to gain ground as traders expect the European Central Bank (ECB) to pause easing cycle at September meeting, with approximately 87% odds for the central bank to keep rates unchanged. Markets are assigning only around a 60% probability of another ECB rate cut before March 2026.
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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