EUR/USD softens below 1.1650 ahead of Fed rate decision
- EUR/USD weakens to around 1.1635 in Wednesday’s Asian session.
- De-escalating US-China tensions weighs on the Euro.
- Fed is widely expected to cut its benchmark interest rate by 25 bps at the conclusion of its October meeting.
The EUR/USD pair loses ground to near 1.1635 during the Asian trading hours on Wednesday. Optimism surrounding US-China trade deals weighs on the riskier currency, like the Euro (EUR) against the US Dollar (USD). Traders brace for the Federal Reserve (Fed) interest rate decision later on Wednesday. On Thursday, the attention will shift to the European Central Bank monetary policy meeting.
US President Donald Trump said on Wednesday that he expects to reduce US tariffs on Chinese goods in exchange for Beijing’s commitment to curb exports of fentanyl precursor chemicals, per Reuters. US Secretary of the Treasury Scott Bessent stated that he also anticipated that the Chinese officials would agree to increase purchases of US-grown soybeans, enhance cooperation with the US to halt the flow of chemicals used to manufacture fentanyl, and sign off on a finalized TikTok deal.
Traders will closely monitor the meeting between Trump and his Chinese counterpart Xi Jinping on Thursday in South Korea to decide on a framework that defuses trade tensions between the world's two largest economies. Positive developments surrounding trade negotiations could lift the Greenback and act as a headwind for the major pair.
On the other hand, the Fed is expected to cut its benchmark interest rates by 25 basis points (bps) at its October meeting on Wednesday, bringing the Federal Funds Rate target to 3.75%-4.00%. Fed Chair Jerome Powell's press conference will be closely watched, as it might offer some hints about the US interest rate path and provide insight into the economic outlook. Any dovish remarks from the Fed officials could drag the USD lower against the EUR.
Across the pond, the ECB is anticipated to hold interest rates steady on Thursday, marking the third consecutive meeting with no change to the key deposit rate. ECB President Christine Lagarde indicated that the current monetary policy is "in a good place” and will adopt a data-dependent approach without pre-committing to a future rate path.
Euro FAQs
The Euro is the currency for the 20 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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