EUR/USD rises to near 1.0450 due to rising odds of Fed keeping rates unchanged in January
- EUR/USD appreciated as the US inflation report has reinforced the odds of the Fed adopting gradual policy easing in 2025.
- CME FedWatch tool suggests a more than 90% probability of the Fed maintaining its current interest rates in January.
- ECB’s Boris Vujcic announced that the central bank intends to reduce borrowing costs further in 2025.
EUR/USD remains steady following the gains from the previous session, trading around 1.0430 during the Asian hours on Monday. This upside of the pair could be attributed to the decline in the US Dollar (USD) following the Personal Consumption Expenditures Price Index (PCE) data from the United States (US).
The November inflation report showed that core PCE inflation year-over-year, the Fed’s preferred inflation measure, rose steadily by 2.8%, slower than estimates of 2.9%. The monthly core inflation grew moderately by 0.1%, against estimates of 0.2% and the prior release of 0.3%.
Lower-than-expected US inflation data has reinforced the market sentiment that the Federal Reserve (Fed) will adopt a slower pace of additional cuts in 2025. According to the CME FedWatch tool, markets now anticipate a more than 90% probability that the Federal Reserve (Fed) will keep interest rates unchanged in January, maintaining the current range of 4.25%–4.50%.
On Sunday, US President-elect Donald Trump announced key appointments to his administration, according to Business Insider. Scott Bessent has been chosen to lead the Treasury, Howard Lutnick will serve as Commerce Secretary, and Kevin Hassett will head the National Economic Council. Additionally, Andrew Ferguson has been selected to chair the Federal Trade Commission, while Jacob Helberg, a senior advisor to Palantir CEO Alex Karp, has been nominated as Secretary of State for Economic Growth, Energy, and Environment.
In the Eurozone, European Central Bank (ECB) Governing Council member Boris Vujcic stated on Saturday that the central bank plans to continue lowering borrowing costs in 2025, according to Bloomberg. “The direction is clear—it’s a continuation of the path from 2024, with further reductions in interest rates,” he said.
Additionally, the approval of taxation reforms by German lawmakers strengthens the Euro, as Germany is the largest economy in the Eurozone. These reforms will increase disposable income for households, boosting consumer demand and stimulating economic growth.
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.