- EUR/USD depreciates as the US Dollar advances on a steady Fed policy outlook.
- The US central bank indicated no rush to lower interest rates anytime soon.
- The Euro may find support as traders price in an end to ECB policy easing.
EUR/USD extends its losing streak for the third successive session, trading around 1.1770 during the Asian hours on Friday. The pair faces challenges as the US Dollar (USD) continues to attract buyers following the release of the United States (US) Weekly Initial Jobless Claims on Thursday. Traders await the German Producer Price Index (PPI) data for August due later in the day.
The US Department of Labour (DOL) released on Thursday, the number of US citizens submitting new applications for unemployment insurance declined to 231K for the week ending September 13. The latest print came in short of initial estimates of 240K and was lower than the previous week’s 264K (revised from 263K). Meanwhile, Continuing Jobless Claims shrank by 7K to 1.920M for the week ending September 6.
The US Dollar remains stronger after the Federal Reserve (Fed) delivered an expected rate cut on Wednesday but signaled no rush to lower borrowing costs quickly in the coming months. Fed Chair Jerome Powell pointed to growing signs of weakness in the labor market to explain why officials decided it was time to cut rates after holding them steady since December amid concerns over tariff-driven inflation.
The downside of the EUR/USD pair could be restrained as the Euro (EUR) may receive support from rising expectations of the European Central Bank (ECB) ending the rate cut cycle following the latest inflation figures.
ECB Vice President Luis de Guindos said that the central bank should follow a "very prudent" approach given the high uncertainty. Guindos added that the current rate is appropriate given inflation trends and the transmission of monetary policy. ECB Governing Council members Martins Kazaks and Gediminas Simkus said earlier this week that interest rates do not need further cuts at the moment, though they did not rule out a potential move in the future.
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.
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