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16 Sep 2024
EUR/USD rises toward 1.1100 amid uncertainty over the Fed rate cut
- EUR/USD appreciates as markets are split over the scale of the Fed’s upcoming rate cut.
- ECB Governing Council member Gabriel Makhlouf said that the central bank is still operating in a "highly uncertain environment".
- Rabobank suggests that unfavorable Eurozone fundamentals will likely limit the upside potential for the EUR/USD pair.
EUR/USD starts the week on a positive note, edging higher to trade around 1.1090 during the Asian session on Monday. Investors are now focused on the highly-anticipated policy decision from the US Federal Reserve (Fed) later this week. Markets remain divided on whether the Fed will cut rates by 25 basis points (bps) or 50 bps.
According to the CME FedWatch Tool, markets anticipate 48.0% odds of a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has increased to 52.0%, up from 50.0% a day ago.
Investors will closely watch the FOMC Press Conference for insights into the future of US interest rates. If Fed Chair Jerome Powell signals a more aggressive easing approach, it could put downward pressure on the US Dollar, providing a potential boost to the EUR/USD pair.
European Central Bank (ECB) Governing Council member and Central Bank of Ireland Governor Gabriel Makhlouf stated on Friday that the central bank is still operating in a "highly uncertain environment" and will rely on data to guide future monetary policy decisions. Makhlouf emphasized that the ECB is not committing to a specific rate path but remains "determined to ensure" that inflation in the Eurozone returns to the 2% target "in a timely manner."
Rabobank's research notes that the ECB announced its second rate cut of the cycle last week, with another cut anticipated before year-end. The latest ECB staff projections also reflect a downward revision in Eurozone growth. While expectations of Fed easing may weaken the USD, Rabobank suggests that unfavorable Eurozone fundamentals are likely to limit the upside potential for the EUR/USD pair in the near future.
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.