EUR/USD ticks up to near 1.1650, French risks might cap upside
- EUR/USD edges up to near 1.1650 as the US Dollar faces selling pressure.
- Fed’s Williams supported the need to look at economic data before getting confident on interest rate cuts in September.
- Opposition parties in France are unlikely to support PM Bayrou’s confidence vote.
The EUR/USD pair edges higher to near 1.1650 during the Asian trading session on Thursday. The major currency pair gains marginally as the US Dollar (USD) faces selling pressure, following dovish remarks on interest rates from New York Federal Reserve (Fed) Bank President John Williams in an interview with CNBC on Wednesday.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.12% lower to near 98.00.
On Wednesday, Fed’s Williams argued in favor of interest rate cuts, but didn’t express confidence over the same for the September policy meeting, citing that officials need to see economic data during the time. "Risks are more in balance. We are going to just have to see how the data plays out," Williams said.
Meanwhile, traders see an 87% chance that the Fed will cut interest rates in the September policy meeting, according to the CME FedWatch tool.
In the Eurozone, growing risks of a snap election in the French economy have capped the upside in the Euro (EUR). Earlier this week, France Prime Minister (PM) François Bayrou called for a confidence vote on September 8 over his €44 billion budget package. In response, opposition parties are not expected to support Bayrou’s confidence vote, a move that could lead to a snap election in the French economy.
On the economic front, investors await preliminary inflation data for August from major economies of the Eurozone, which will be published on Friday.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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