Euro edges higher against US Dollar, focus is on Fed’s policy
- EUR/USD ticks up to near 1.1393 as the US Dollar edges down ahead of the Fed’s policy.
- The Fed is expected to leave interest rates unchanged for the fifth time in a row.
- Investors await the German and Eurozone inflation data for fresh cues regarding the ECB’s monetary policy outlook.
The Euro (EUR) ticks higher against the US Dollar (USD) at around 1.1393 during the European trading session on Wednesday. The major currency pair edges up as the US Dollar is slightly down ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally lower to near 101.30.
According to the CME FedWatch tool, traders see a 69.5% chance that the Fed will leave interest rates unchanged in the range of 3.50%-3.75%. This would be the fifth straight meeting when the Fed will maintain the status quo.
Investors will pay close attention to the monetary policy statement and Fed Chairman Kevin Warsh’s press conference to get cues regarding whether the central bank is leaning towards United States (US) President Donald Trump’s economic agenda.
On Monday, US President Trump urged Fed Chairman Kevin Warsh to lower interest rates, adding that there was a good inflation report recently, costs were falling rapidly, and that prices should drop significantly once the Gulf War ends.
On the Eurozone front, investors await the German and the Eurozone flash Harmonized Index of Consumer Prices (HICP) data for July, which will be released on Thursday and Friday, respectively.
According to estimates, the German headline HICP grew at a stronger pace of 2.8% Year-on-Year (YoY) from 2.4% in June. Strong German inflation growth would prompt European Central Bank (ECB) interest rate hike expectations.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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