EUR/USD recovers from one-month low amid softer USD and Fed divergence
- The Euro gains nearly 0.50% on Friday, lifting EUR/USD above 1.1650.
- The US Dollar Index slips toward 98.00, giving up most of the week’s gains.
- The University of Michigan Consumer Sentiment beats expectations but fails to lift the US Dollar.
The Euro (EUR) gains positive traction against the US dollar (USD) on Friday, supported by a softer Greenback amid easing US Treasury yields and cautious market sentiment. The USD is under mild pressure following a brief surge during the week, as traders react to growing divergence among Federal Reserve (Fed) officials on the timing and pace of interest rate cuts.
The EUR/USD is ticking higher during Friday’s American trading hours, with the pair trading around 1.1653. At the time of writing, up over 0.50% on the day.
Meanwhile, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, remains under pressure near 98.18, having retraced most of its weekly gains. Despite a solid Michigan Consumer Sentiment report, the DXY is holding losses, as the data lacked the punch to revive bullish momentum.
The University of Michigan’s preliminary Consumer Sentiment Index for July rose to 61.8 from 60.7 in June, beating expectations of 61.5. Both the Current conditions and Expectations components improved, reflecting cautious optimism among US households. The data added to signs of economic resilience, reinforcing the view that the Fed can afford to delay interest rate cuts.
The growing divergence among Fed officials continues to cloud the interest rate outlook. While Governor Christopher Waller advocated for a 25 bps cut in July, citing softening job growth and downplaying tariff-driven inflation as transitory, New York Fed President John Williams warned that tariff effects could fuel persistent inflation through 2026. Adding to the mix, Fed Governor Adriana Kugler struck a more balanced tone, backing the case for keeping interest rates steady for “some time” to ensure inflation remains on a sustained path toward the 2% target.
The Euro came under pressure earlier in the week after US President Donald Trump unveiled plans to impose a 30% tariff on imports from the European Union (EU), set to take effect on August 1, reigniting fears of a fresh transatlantic trade conflict. The tariff threat weighed on market sentiment, sparking concerns over retaliatory measures from the EU and their potential impact on global trade flows. Adding to the downside pressure, a string of upbeat US economic data boosted the US Dollar, dragging EUR/USD to its lowest level in nearly a month.
Looking ahead, the European Central Bank (ECB) is set to announce its policy decision next Wednesday, July 24. Markets widely expect the central bank to keep rates unchanged after delivering a 25 bps cut in June, as officials assess incoming data and global risks. The tariff threat from the US adds a layer of uncertainty, but is unlikely to alter the near-term policy stance.
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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