EUR/USD gains momentum above 1.1700 ahead of ECB’s Lagarde speech
- EUR/USD trades firmer around 1.1705 in Monday’s Asian session.
- Traders now see an 89% chance that Fed will lower its benchmark rate by 25bps at the September meeting.
- Von der Leyen said Europe has a ‘pretty precise’ plan to send troops to Ukraine.
The EUR/USD pair trades on a stronger note near 1.1705 during the Asian trading hours on Monday. The rising rate cut expectation from the US Federal Reserve (Fed) continues to weigh on the Greenback against the Euro (EUR). Later on Monday, the European Central Bank (ECB) President Christine Lagarde is scheduled to speak.
The Personal Consumption Expenditures (PCE) Price Index came in line with the expectations in July, according to the US Bureau of Economic Analysis. The headline PCE rose 2.6% YoY in July, while core PCE, which excludes the more volatile food and energy, climbed 2.9% in the same report period. Despite the hot inflation report, traders still ramp up their bets of a Fed rate reduction this month.
Fed Chair Jerome Powell hinted in his Jackson Hole address earlier this month that the Fed is open to easing policy. Hawkish Fed Governor Christopher Waller also signaled that a rate cut is appropriate, saying he would entertain a larger move if labor market data continue weakening.
Traders are now pricing in nearly an 89% possibility of a 25 basis points (bps) rate cut by the Fed at the September policy meeting, up from an 85% chance before the US PCE data, according to the CME FedWatch tool.
Across the pond, the escalating tensions between Russia and Ukraine might drag the EUR. The European Commission President, Ursula von der Leyen, said that European countries are working on “pretty precise plans” for potential military deployments to Ukraine as part of post-conflict security guarantees that will have the full backing of US capabilities.
Persistent conflict between Russia and Ukraine implies higher energy costs and increases geopolitical uncertainty in the Eurozone, which generally exerts some selling pressure on the EUR.
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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