Euro stays near three-month high as US Dollar remains subdued
- EUR/USD holds modest gains as the US Dollar struggles to regain traction.
- Upbeat German GDP and Ifo data offer support to the Euro.
- Traders await US inflation data and Kevin Warsh’s Jackson Hole speech.
EUR/USD holds modest gains on Tuesday as the latest Middle East developments fail to trigger a strong market reaction, while the US Dollar (USD) struggles to recover from last week’s sell-off sparked by the US Treasury’s decision to increase buybacks of longer-dated government securities. At the time of writing, the pair trades around 1.1671, below the three-month high of 1.1711 touched on Friday.
Pakistan’s Interior Minister Mohsin Naqvi said he and Army Chief Asim Munir held a “very positive and productive meeting” with Iranian President Masoud Pezeshkian, adding that “significant progress” was made. Pakistan has been acting as a mediator between the United States and Iran.
The diplomatic push comes after the US Treasury launched “Operation Economic Outcast” on Monday, a wider sanctions campaign aimed at cutting off financial support for the Iranian government.
The Greenback, meanwhile, struggles for traction as the Treasury’s buyback decision revives concerns about the US fiscal outlook and rising government debt, bringing the USD debasement trade back into focus. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 98.95 after briefly climbing above 99.00 earlier in the day.
US labour data released on Tuesday showed that the ADP Employment Change four-week average rose to 11.75K from 9.5K previously. Traders now await the US Personal Consumption Expenditures (PCE) Price Index on Wednesday for fresh clues about inflation and the Federal Reserve’s (Fed) interest-rate path. Attention will then shift to Fed Chairman Kevin Warsh’s speech at the Jackson Hole Symposium on Friday.
Stronger-than-expected German Gross Domestic Product (GDP) and Ifo Business Climate data offer some support to the Euro (EUR). Germany’s economy grew 0.3% in the second quarter, slightly above the preliminary estimate and market expectation of 0.2%. On an annual basis, GDP expanded 1.0%, beating the 0.9% forecast and accelerating from 0.7% previously.
On the monetary policy front, the Fed and the European Central Bank (ECB) are expected to take different paths at their upcoming meetings. The Fed is widely expected to keep rates unchanged, while the ECB is seen raising borrowing costs in September.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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