EUR/USD remains stronger near 1.1700 amid rising bets of Fed rate cuts
- EUR/USD gains ground as the US Dollar struggles aid rising likelihood of a Fed rate cut in September.
- San Francisco Fed President Mary Daly said that policymakers are preparing to lower interest rates soon.
- ECB’s Olli Rehn stated that the current uncertainty surrounding inflation trends requires “flexibility” in policymaking.
EUR/USD extends its winning streak for the fifth successive session, trading around 1.1700 during the Asian hours on Monday. The pair appreciates as the US Dollar (USD) faces challenges amid rising bets of an interest rate cut by the US Federal Reserve (Fed) in the September meeting. United States (US) markets will observe Labor Day holiday on Monday.
However, Friday’s data showed that United States (US) inflation rose in July, which could be attributed to the US President Donald Trump’s tariffs. The US core Personal Consumption Expenditures (PCE) Price Index, which excludes volatile food and energy prices, rose 2.9% year-over-year in July, as expected and following June's increase of 2.8%. On Monthly basis, the core PCE Price Index rose 0.2% and 0.3%, respectively.
San Francisco Fed President Mary Daly said on Sunday that policymakers will be ready to cut the interest rates soon, adding that inflation stemming from tariffs will likely prove temporary, per Bloomberg.
Additionally, Fed Governor Christopher Waller on Thursday reiterated his support for a cut, saying he would entertain a larger move if labor market data continue weakening. The rising Fed rate cut bets and dovish remarks from Fed officials could drag the Greenback lower and act as a tailwind for the pair in the near term.
European Central Bank (ECB) Governing Council member Olli Rehn said on Sunday that current uncertainty over inflation developments calls for “flexibility” in policymaking. Rehn added, “There are more downside risks to inflation stemming from a stronger Euro (EUR), cheaper energy and easing of core inflation, together with the damage trade-policy has caused to the global economy.” “Rate decisions are taken meeting by meeting, based on the latest available data,” reported by Bloomberg.
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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