EUR/USD loses momentum to near 1.1850 ahead of ECB’s Lagarde speech, Fed rate decision
- EUR/USD softens to around 1.1855 in Wednesday’s Asian session.
- Traders have fully priced in a 25 bps Fed rate cut.
- German ZEW sentiment improves in September.
The EUR/USD pair loses momentum near 1.1855, snapping the four-day winning streak during the Asian trading hours on Wednesday. Nonetheless, the potential downside of the major pair might be limited, as economists expect the Federal Reserve (Fed) to deliver a 25 basis points (bps) rate cut at the conclusion of its two-day meeting on Wednesday.
The Fed is widely expected to lower its key lending rate in the range of 4.0% to 4.25%, the lowest level since late 2022. The probability of a 25 bps cut stands at 96%, according to CME FedWatch, which relies on 30-day Fed Funds futures prices to determine the likelihood. There's only a 4% chance of a jumbo cut of 50 bps.
Traders will take more cues from the speech from the Fed’s Chair Jerome Powell after the policy meeting. "A 25 bp cut gives room for a somewhat dovish leaning, while a 50 bp cut would allow Chair Powell to be as hawkish as he likes, as the move itself would dominate aggregate impact," said ING economists.
Across the pond, the ZEW Economic Sentiment survey in Germany showed that investors’ expectations are growing optimistic, which might provide some support to the shared currency. Germany’s ZEW Economic Sentiment Index rose to 37.3 points from 34.7 points in August, stronger than the expectation of 26.3 points.
The ECB President Christine Lagarde is set to speak later on Wednesday. Any dovish remarks from ECB policymakers could weigh on the EUR against the USD in the near term. The final reading of Harmonized Index of Consumer Prices (HICP) data from the Eurozone will be published later on the same day.
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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