EUR/USD flat lines below 1.1900; divergent Fed-ECB expectations offer support
- EUR/USD consolidates in a range during the Asian session amid mixed fundamental cues.
- The upbeat US NFP tempers bets for more Fed rate cuts and lends some support to the USD.
- Relatively hawkish ECB expectations act as a tailwind for the EUR and the currency pair.
The EUR/USD pair struggles to capitalize on the overnight bounce from the 1.1835-1.1830 region and oscillates in a narrow band during the Asian session on Thursday. Spot prices currently trade around the 1.1875 area, remaining nearly unchanged for the day and staying within striking distance of an over one-week high, reached on Tuesday, amid mixed cues.
Investors trimmed their expectations for more aggressive policy easing by the US Federal Reserve (Fed) following the release of a strong US Nonfarm Payrolls (NFP) report on Wednesday. Furthermore, hawkish comments from Kansas City Fed President Jeffrey Schmid, saying that further rate cuts risk allowing high inflation to persist even longer, assist the US Dollar (USD) to hold steady above a nearly two-week low. This, in turn, is seen as a key factor acting as a headwind for the EUR/USD pair.
Market participants, however, are still pricing in the possibility of at least two 25 basis points (bps) Fed rate cuts in 2026. Adding to this, threats to the US central bank's independence, along with the underlying bullish sentiment, contribute to capping the safe-haven Greenback. The shared currency, on the other hand, is underpinned by the growing acceptance that the European Central Bank (ECB) would likely hold interest rates steady for the rest of the year, lending support to the EUR/USD pair.
There aren't any relevant market-moving economic releases due from the Eurozone on Thursday, while the US economic docket features the usual Weekly Initial Jobless Claims later during the North American session. The spotlight now shifts to the US consumer inflation figures, due on Friday. The crucial data will be looked for more cues about the Fed's rate-cut path, which, in turn, will play a key role in influencing the USD price dynamics and providing some meaningful impetus to the EUR/USD pair.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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