Euro slips as traders await Fed and ECB monetary policy decisions
- EUR/USD edges lower as a firmer US Dollar and France's fiscal concerns weigh on the Euro.
- Traders await this week's Fed and ECB policy decisions, with both central banks expected to hold interest rates steady.
- Upcoming US inflation and Eurozone growth figures could influence expectations for December policy moves.
EUR/USD edges lower on Monday as a rebound in the US Dollar (USD) weighs on the Euro (EUR) ahead of this week’s Federal Reserve (Fed) and European Central Bank (ECB) monetary policy decisions. Meanwhile, France’s worsening fiscal outlook and bond-market pressures remain additional headwinds for the Euro.
At the time of writing, the pair trades around 1.1183, down 0.17% on the day. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.99 after falling to 101.45 last week, its lowest level since October 1.
The Fed announces its decision on Wednesday, followed by the ECB on Thursday, with both central banks widely expected to leave interest rates unchanged. Inflation remains above their respective 2% targets, while higher energy costs linked to Middle East tensions keep risks tilted to the upside. With traders anticipating rate hikes from both in December, guidance on the policy outlook could drive a stronger market reaction than the decisions themselves.
Euro faces headwinds as higher oil and inflation expectations outpace ECB response
According to Commerzbank, the recent rise in oil prices should be particularly problematic for the Euro, as “higher oil prices in particular should put greater pressure on the euro, as their impact on both inflation and economic activity in the euro area is more pronounced and, on balance, negative for the currency.” The bank notes that “short-term inflation expectations have risen more strongly in the euro area than in the US,” and that “higher inflation expectations are currently not being offset by a corresponding shift in relative interest-rate expectations.” Taken together, Commerzbank argues, “this is, in principle, a negative signal for the euro.”
At the same time, the bank observes that the recent widening in French spreads has not yet translated into broader Eurozone stress, commenting that “this suggests that the market currently views the fiscal concerns largely as a French problem.” Commerzbank sees “one possible explanation” in “the expectation that the ECB would intervene if contagion became more pronounced, thereby limiting the risk of broader fragmentation in the euro-area bond market.”
Beyond the central bank decisions, a busy economic calendar could also influence EUR/USD this week. Tuesday’s US releases include the ADP employment update, September Durable Goods Orders, October Consumer Confidence and September New Home Sales. Thursday brings September Personal Consumption Expenditures (PCE) inflation, the advance estimate of third-quarter Gross Domestic Product (GDP) and weekly Initial Jobless Claims.
In the Eurozone, October business climate, consumer confidence and economic sentiment figures are due on Thursday. Friday’s releases include preliminary third-quarter GDP and the unemployment rate for the bloc, alongside Germany’s preliminary October Consumer Price Index (CPI).
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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