EUR/USD holds positive ground near 1.1500 ahead of Fed rate decision
- EUR/USD gains traction to near 1.1500 in Wednesday’s Asian session.
- The Fed is likely to keep rates steady at the June meeting on Wednesday.
- The hawkish ECB bets support the Euro, but persistent Israel-Iran tensions might cap its upside.
The EUR/USD pair attracts some buyers to around 1.1500 during the Asian trading hours on Wednesday. A slew of downbeat US economic data weigh on the Greenback. However, escalating Israel-Iran tensions might cap the upside for the major pair. The US Federal Reserve (Fed) rate decision will be closely watched later on Wednesday.
Eroding confidence in the US economy amid trade policies undermines the US Dollar (USD) against the Euro (EUR). Data released by the US Census Bureau on Tuesday revealed that Retail Sales in the United States fell by 0.9% MoM in May, compared to the 0.1% decrease (revised from +0.1%) recorded in April. This figure came in weaker than the estimations of -0.7%. Meanwhile, the US Industrial Production declined by 0.2% MoM in May versus 0.1% prior (revised from 0%), worse than the 0.1% expected.
Traders expect the US Fed to leave borrowing costs unchanged at its June meeting on Wednesday. The markets are now pricing in nearly 80% odds of a Fed rate cut in September, followed by another one in October, according to Reuters.
"In the very near term a cautious message will probably be reemphasised, but what will be interesting is how they interpret and navigate the new forecast, which we think will show a lower growth path alongside potentially stickier inflation," said currency strategist Rodrigo Catril at National Australia Bank.
The hawkish tone from the European Central Bank (ECB) policymakers supports the shared currency. ECB President Christine Lagarde said that rate reductions are coming to an end as the central bank is now “in a good position” to deal with prevailing uncertainties.
Meanwhile, investors will keep an eye on geopolitical risks. Israel is set to intensify its attacks on Tehran, while the US is considering expanding its role amid rising tensions between Israel and Iran. Any signs of escalation could boost the safe-haven flows, benefiting the Greenback.
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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