Euro struggles as softer-than-expected US econoomic data offer little relief
- EUR/USD struggles to attract buyers as softer US data fail to meaningfully weaken the US Dollar.
- Hawkish Fed expectations keep the Greenback supported ahead of Friday’s Nonfarm Payrolls report.
- Eurozone inflation strengthens the case for an ECB hike in September.
EUR/USD struggles to attract buyers on Tuesday despite below-forecast US economic data, as the US Dollar (USD) shows little weakness following the release. At the time of writing, the pair trades around 1.1601 after touching an intraday low of 1.1587, but remains down roughly 0.14% on the day.
The ISM Manufacturing Purchasing Managers Index (PMI) fell to 54.6 in August from 55.6 in July, missing the market forecast of 55.2. The ISM Prices Paid Index held steady at 71.1, below expectations of 72.0, while JOLTS Job Openings rose to 7.271 million in July from 7.182 million but fell short of the 7.3 million forecast.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, retreats toward 99.55 after reaching an intraday high of 99.65. However, the downside in the US Dollar remains limited as the data do little to alter hawkish Fed expectations, with broader market sentiment still tied to inflation concerns.
Fed Chair Kevin Warsh’s tough stance at the Jackson Hole Symposium put September rate hike bets firmly back on the table. Adding to the hawkish tone, Fed Governor Michael Barr said on Tuesday that “the persistence of inflation above target creates risks.” Barr added that he favours steady rates if confident inflation is moderating but warned that “if inflation doesn’t moderate soon, it will be time for an interest rate hike.”
According to the CME FedWatch Tool, traders see around a 66% probability that the central bank will raise borrowing costs at its September 15-16 meeting. Attention now shifts to Friday’s Nonfarm Payrolls (NFP) report.
Elevated Oil prices due to tensions in the Middle East are also adding to inflation risks across major economies, reinforcing expectations that central banks will maintain a hawkish stance. Against this backdrop, the European Central Bank (ECB) is widely expected to raise interest rates this month.
Data released earlier in the day showed that the Eurozone Harmonized Index of Consumer Prices (HICP) rose 0.4% MoM in August, accelerating from the 0.2% increase recorded in July. Core HICP increased 0.2% after remaining flat in the previous month. ECB policymaker Gediminas Šimkus said on Tuesday, “It is clear that we should hike rates in September,” adding, “New projections are likely to move the rate path up a bit.”
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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