EUR/USD pair has continued its downward trajectory for the second consecutive session, trading around 1.1510 during the early hours of the Asian market on Monday. Despite this decline, analysts suggest that the potential for further losses may be limited as the Euro shows signs of gaining momentum. This is driven by a cautiously optimistic sentiment surrounding the European Central Bank’s (ECB) monetary policy direction.
Market expectations indicate that the ECB is likely to maintain its current interest rates through the end of 2026, a strategy bolstered by inflation figures stabilizing near the ECB’s 2% target. This stability, coupled with steady economic growth and record-low unemployment levels, strengthens the argument for a stable monetary policy. Preliminary data for Eurozone private-sector activity, which showed solid growth in November—though slightly below October’s peak—aligns with forecasts and reinforces the ECB’s cautious stance.
Christine Lagarde, the President of the ECB, emphasized last Friday the bank’s commitment to closely monitoring inflation risks. She indicated that adjustments to interest rates may occur if necessary, to uphold the target inflation rate of 2%. Additionally, Gabriel Makhlouf, a member of the ECB Governing Council and Governor of the Central Bank of Ireland, reiterated that the current monetary policy is deemed appropriate, with any changes only considered in response to significant economic shifts.
The EUR/USD pair may also benefit from a weakening US Dollar, as renewed expectations surrounding a potential Federal Reserve rate cut in December dampen market sentiment. The CME FedWatch Tool has shown an increase in market optimism, now reflecting a 69% probability of a 25 basis points reduction in the Fed’s benchmark overnight borrowing rate during its upcoming meeting, a sharp rise from the 44% forecast just a week prior.
In the broader context of currency trading, the Euro stands as the second most heavily transacted currency globally, used by 20 EU countries within the Eurozone. Accounting for 31% of all foreign exchange transactions in 2022, it boasts an impressive daily turnover exceeding $2.2 trillion. The EUR/USD pair is the most traded currency combination, responsible for approximately 30% of global currency transactions.
The European Central Bank, which governs monetary policy from its headquarters in Frankfurt, carries the primary mandate of maintaining price stability. This involves either regulating inflation or fostering economic growth, primarily through managing interest rates. Decisions impacting monetary policy are reached during eight annual meetings convened by heads of Eurozone national banks and six permanent members, including Christine Lagarde.
Various economic indicators play a pivotal role in influencing the Euro’s value. Crucial data on GDP, Manufacturing and Services PMIs, employment numbers, and consumer sentiment can significantly sway the market. A thriving economy typically attracts foreign investment, which can lead to increased pressure on the ECB to hike interest rates, thereby bolstering the Euro’s strength.
Moreover, the trade balance of Eurozone nations also serves as a vital metric. A positive trade balance—indicating that a country earns more from exports than it spends on imports—can lead to a stronger currency, as higher demand for exports attracts foreign buyers. In contrast, a negative trade balance can weaken the Euro.
As the European economy continues to navigate various challenges and opportunities, the interplay between economic indicators, monetary policy, and global market sentiment remains crucial in shaping the Euro’s trajectory against the US Dollar.
