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18 Dec 2024
EUR/USD strengthens above 1.0500, all eyes are on Fed rate decision
- EUR/USD gains momentum to around 1.0505 in Wednesday’s Asian session.
- The US Fed is expected to make a third consecutive rate cut at its December meeting on Wednesday.
- The rising bet for the ECB's further interest rate cuts could undermine the Euro.
The EUR/USD pair holds positive ground to near 1.0505 during the early European session on Wednesday. However, the cautious sentiment ahead of the Federal Reserve (Fed) interest rate decision meeting could weigh on riskier assets like the Euro (EUR).
The Fed is widely expected to lower borrowing costs by 25 basis points (bps) at its December meeting on Wednesday, bringing its overnight borrowing rate by a quarter percentage point to a range of between 4.25% and 4.50% from its current range of between 4.50% and 4.75%. The attention will shift to the Fed’s updated economic projections and the dot plot, which might offer some hints about expectations for the rate trajectory through 2025 and 2026. Any signs of a more cautious stance on rate reduction going forward could boost the Greenback against the Euro (EUR).
Across the pond, the European Central Bank (ECB) President Christine Lagarde noted on Monday that further interest rate cuts were likely. “The direction of travel is clear, and we expect to lower interest rates further,” Lagarde said. Additionally, the ECB Governing Council member Olli Rehn stated that interest rates will continue to head lower as inflation starts to stabilize around the 2% target. Isabel Schnabel, the ECB's most influential policy hawk, emphasized market bets on further gradual reductions in borrowing costs in the Eurozone as the economy stutters and fears about high inflation fade.
However, the pace and size of the rate cuts will be determined in each meeting on the basis of incoming data and comprehensive analysis. This, in turn, might cap the upside for the major pair in the near term.
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.