- EUR/USD softens to near 1.0400 in Tuesday’s early Asian session.
- The Fed sees fewer interest rate cuts in 2025 amid a slowdown in the disinflation process.
- ECB’s Lagarde said the Eurozone inflation was getting “very close” to reaching 2% in the near term.
The EUR/USD pair trades with mild losses around 1.0400 during the early Asian session on Tuesday. The expectation that the US Federal Reserve (Fed) will deliver fewer rate cuts in 2025 provides some support for the Greenback. Trading volumes are likely to be low ahead of the holiday trading week.
A renewed “higher for longer” policy approach by the Fed will hang over the final trading days of the year, which might lift the US Dollar (USD) broadly. The US central bank lowered its benchmark interest rate by another quarter point last week. According to the latest quarterly dot plot, the Fed committee has dialed back its expectations for rate reductions in 2025 and beyond. The Fed now predicts just a 50 basis points (bps) reduction or two rate cuts, down from four quarter-point cuts.
Across the pond, the Euro (EUR) weakens amid rising bets of further rate reduction by the European Central Bank (ECB). The ECB President Christine Lagarde said on Monday that the Eurozone was getting “very close” to reaching the ECB’s medium-term inflation target, per the Financial Times on Monday. Lagarde further stated that the central bank would cut interest rates further if inflation continued to ease towards its 2% goal, as curbing growth was no longer necessary.
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.
Read the full article here
