EUR/USD stays below 1.1600, Fed rate cut bets bolster upside potential
- EUR/USD may regain its ground amid growing odds of a Fed rate cut in December.
- CME FedWatch Tool suggests pricing in an 87% chance of a 25-basis-point rate cut in December.
- ECB Minutes showed policymakers prefer holding rates amid uncertainty, with some indicating no additional easing may be required.
EUR/USD ticks lower after three days of gains, trading around 1.1590 during the Asian hours on Friday. The pair loses ground as the US Dollar (USD) holds ground after three days of losses. However, the Greenback may face challenges amid growing expectations of a Federal Reserve (Fed) rate cut in December.
According to the CME FedWatch Tool, markets are now pricing in over an 87% chance of a 25 bps cut at the upcoming December meeting, a sharp rise from the 39% probability seen just a week earlier. Traders are also anticipating three additional rate cuts by the end of 2026.
These expectations for additional rate cuts firmed after reports indicated that White House National Economic Council Director Kevin Hassett is the leading candidate for the next Fed chair. Traders see Hassett as aligned with US President Donald Trump’s preference for lower interest rates.
The EUR/USD pair may find support after European Central Bank (ECB) Minutes showed policymakers favored keeping rates unchanged amid ongoing uncertainty, with some suggesting no further easing may be needed. The Governing Council viewed policy as “in a good place,” backed by resilient growth and inflation nearing target.
Several policymakers argued the rate-cut cycle may already be over, given that the economic and inflation outlook broadly aligns with the ECB’s September projections and current favorable conditions persist.
Euro FAQs
The Euro is the currency for the 20 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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