EUR/USD strengthens to near 1.1650 on Fed rate cut bets and strong German data
- EUR/USD edges higher to around 1.1645 in Tuesday’s early European session.
- The US central bank is expected to deliver a rate cut on Wednesday.
- Germany’s Industrial Production came in stronger than expected in October.
The EUR/USD pair gains ground to near 1.1645 during the early European session on Tuesday. The prospect of a US interest rate cut on Wednesday weighs on the US Dollar (USD) against the Euro (EUR). Traders will keep an eye on the US ADP Employment Change four-week average and Jolts Job Openings reports for September and October later on Tuesday.
The US Federal Reserve (Fed) is widely expected to cut interest rates by 25 basis points (bps) at the conclusion of its final 2025 policy meeting on Wednesday. This move would bring the federal funds rate to 3.50% to 3.75%. According to the CME FedWatch tool, financial markets are now pricing in nearly a 90% odds of a quarter-point rate reduction.
Traders will closely watch the Fed Chair Powell's press conference and the updated Summary of Economic Projections (SEP), or "dot plot,” as it might offer some hints about the US interest rate path. However, many analysts anticipate a "hawkish cut” at the December meeting, which could lift the Greenback and create a headwind for the major pair.
Across the pond, the upbeat economic data from Germany and the Eurozone could provide some support to the shared currency. Germany’s Industrial Production climbed by 1.8% MoM in October, versus an increase of 1.3% prior, Destatis showed on Monday. This figure came in above the market consensus of a 0.4% decline. Meanwhile, the Eurozone’s Sentix Investor Confidence improved to -6.2 in December from -7.4 in November.
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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