- EUR/USD prints a fresh three-week high above 1.0900 as Fed rate-cut bets for September surge.
- Cooling US inflationary pressures have boosted Fed rate-cut bets.
- Investors await Fed Powell’s speech and ECB policy meeting.
The EUR/USD pair refreshes a three-week high slightly above the round-level figure of 1.0900 in Monday’s European session. Sheer strength in the major currency pair is driven by strong possibility of the Federal Reserve (Fed) to begin reducing interest rates from the September meeting and improved appeal of the Euro ahead of the European Central Bank (ECB) policy meeting, which is scheduled for Thursday.
Market sentiment remains risk-on as the Fed is widely anticipated to cut interest rates in September. S&P 500 futures have posted significant gains in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, remains on the backfoot near 104.00.
The Fed rate-cut expectations have been fuelled by easing price pressures and cooling labor market conditions. The United States (US) Consumer Price Index (CPI) report for June showed that the disinflation process has resumed as inflationary pressures grew slower-than-expected for the second straight time.
Meanwhile, investors await Fed Chair Jerome Powell’s speech, which is scheduled for 16:30 GMT. The comments from Fed Powell will indicate when the central bank will start reducing interest rates.
On the other side of the Atlantic, the Euro will dance to the tunes of ECB monetary policy meeting. The ECB is widely anticipated to leave its key rates unchanged. Therefore, investors will majorly focus on the cues about when the ECB will take its second rate-cut decision. On June 6, the ECB lowered its interest rates for the first time since its policy-tightening cycle was initiated in July 2022.
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.
