EUR/USD extends downside below 1.1650 ahead of ECB’s Lagarde speech
- EUR/USD softens to around 1.1635 in Wednesday’s early European session.
- Traders await the Fed’s annual Jackson Hole symposium on Friday to see whether Powell pushes back on rate cut bets.
- A possible agreement to legitimize or end Russia's invasion of Ukraine might cap the pair’s downside.
The EUR/USD pair extends the decline to near 1.1635 during the early European trading hours on Wednesday. The US Dollar (USD) strengthens against the Euro (EUR) as traders await the Federal Reserve's (Fed) annual Jackson Hole symposium later on Friday for clues on the US interest rate path.
A weak US Nonfarm Payrolls (NFP) report earlier this month and cool Consumer Price Index (CPI) inflation data raised the odds for a Fed cut on September 17. Nonetheless, a hotter-than-expected Producer Price Index (PPI) reading last week complicated the Fed’s policy picture.
Traders pared bets on a rate cut at the US Federal Reserve (Fed) at the September meeting, providing some support to the Greenback. Financial markets have priced in nearly 84% odds of such reductions and anticipate about 54 basis points (bps) of rate cuts by year-end.
The speech by Fed Chair Jerome Powell will take center stage on Friday as traders will keep an eye on any pushback against market pricing of a rate cut next month. If Powell leans dovish on interest rates, this might drag the USD lower and act as a tailwind for the major pair.
Across the pond, the European Central Bank’s (ECB) President Christine Lagarde speech will be the highlight on Wednesday. The remarks from ECB policymakers might offer some hints about the interest rate outlook in the Eurozone. Forward contracts on the ECB's official overnight benchmark interest rate, the euro short-term rate (ESTR), imply around a 60% probability of a 25 basis point rate cut (bps) by March and a deposit rate of 1.92% in December 2026.
Meanwhile, a potential agreement to legitimize or end Russia's invasion of Ukraine might help limit the EUR’s losses. US President Donald Trump said on Tuesday that arrangements were being made for a meeting between Russian President Vladimir Putin and Zelenskiy, which could lead to a trilateral summit involving all three leaders. Any possible peace deal implies lower energy costs and reduced geopolitical uncertainty in the Eurozone, which generally provides some support to the shared currency.
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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