EUR/USD strengthens above 1.1500 as Fed rate cut bets grow
- EUR/USD gains ground to around 1.1525 in Monday’s early European session.
- Fed’s Williams said he sees room for ‘further adjustment’ to rates.
- The ECB’s cautious tone underpins the Euro against the US Dollar.
The EUR/USD pair trades in positive territory around 1.1525 during the early European trading hours on Monday. The US Dollar (USD) edges lower against the Euro (EUR) as Federal Reserve (Fed) rate cut expectations rise. Traders brace for the release of the US September Producer Price Index (PPI) and Retail Sales later on Tuesday.
Traders raise their bets on a Fed rate cut in December following dovish comments from New York Fed President John Williams, weighing on the Greenback. Williams said on Friday that he expects the US central bank to lower its key interest rate from here as labor market weakness poses a bigger threat than higher inflation. The probability of a Fed rate cut next month surged to 70% on Monday after falling to 40% in the previous week, according to the CME FedWatch Tool.
Meanwhile, several Fed officials delivered cautious comments, including Boston Fed President Susan Collins and Dallas Fed President Lorie Logan. Susan Collins said that she would have a “high bar” for supporting further rate cuts, while Lorie Logan noted, “In the absence of clear evidence that justifies further easing, holding rates steady for a time would allow the FOMC to better assess the degree of restriction from current policy.
The European Central Bank (ECB) is widely expected to leave interest rates unchanged through at least the end of 2025 and into 2026, after keeping its key interest rates steady at its October meeting. A Reuters poll of economists in November confirmed this expectation, citing a stable economic outlook and contained inflation.
ECB President Christine Lagarde said on Friday that the central bank will remain vigilant to inflation risks and will adjust interest rates, if needed, to keep inflation at 2% target. The cautious stance from the ECB could provide some support to the EUR against the JPY in the near term.
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.