EUR/USD strengthens to near YTD top below 1.1050 on firm Fed rate cut prospects
- EUR/USD edge higher to YTD highs near 1.1040 in Monday’s early European session.
- Fed’s Dovish remarks and higher bets on Fed rate cut in September continue to undermine USD and lift EUR/USD.
- The Euro gains ground as the markets expect the ECB to reduce interest rates gradually.
The EUR/USD pair rises to the year-to-date (YTD) highs near 1.1040 during the early European section on Monday. The softer US Dollar (USD) across the board amid the growing speculation that the Federal Reserve (Fed) will cut the interest rate in September provides some support to the major pair. Traders will closely monitor Fed Chair Jerome Powell’s speech on Friday for more cues about potential interest rate cuts.
San Francisco Fed President Mary Daly said on Sunday that recent US economic data have given her “more confidence” that inflation is under control, adding that it’s time to consider adjusting borrowing costs from their current range of 5.25% to 5.5%. Meanwhile, Chicago Fed President Austan Goolsbee emphasized on Sunday that the US central bank officials should be wary of keeping the restrictive policy in place longer than necessary. The dovish comments from Fed policymakers further exert some selling pressure on the Greenback and create a tailwind for EUR/USD.
Investors are now pricing in about 70% odds of a quarter-point Fed rate cut in September, while a minority of investors expect a half-point move. Morningstar chief US economist, Preston Caldwell, noted that the CPI report “provides further support for aggressive Fed rate cuts beginning in September.” Caldwell sees a 25bps cut to start, which will take Fed Funds to 5.00-5.25%.
Across the pond, the Euro (EUR) remains strong as the markets anticipate the European Central Bank (ECB) will reduce interest rates gradually. ECB President Christine Lagarde underscored at the latest press conference that policymakers are “not pre-committing to a particular rate path. The consensus was to adhere to a data-dependent and meeting-by-meeting approach.
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.