The EUR/USD currency pair continued its downward trajectory, trading around 1.1610 during the Asian trading session on Monday. This marks the second consecutive day of losses for the euro, as the US Dollar (USD) gains traction, fueled by cautious comments from officials at the US Federal Reserve (Fed). These remarks have contributed to a reduced expectation of an interest rate cut happening in December.
Kansas City Fed President Jeffery Schmid expressed on Friday that monetary policy should “lean against demand growth,” indicating that the current Fed stance is “modestly restrictive.” Schmid believes this approach is appropriate given the existing economic context. In the wake of these statements, the CME FedWatch Tool reported a significant drop in market expectations for an interest rate cut, now estimating a 46% probability for a reduction of 25 basis points in the benchmark overnight borrowing rate at the upcoming December meeting. This is a decrease from the previous week’s 67% likelihood.
The USD also found additional support following the reopening of the US government, which was made possible after President Donald Trump signed a funding bill into law last week. This action effectively ended the longest government shutdown in US history, which lasted 43 days, allowing federal employees to return to work on Thursday.
In Europe, Bloomberg reported that European Central Bank (ECB) Governing Council Member Olli Rehn cautioned against ignoring the risks associated with slowing inflation, while also acknowledging that there are upside risks within the eurozone economy. Despite facing challenges from the tariff policies of the Trump administration, Rehn noted that the euro-area economy is demonstrating slow but steady growth. He stressed the importance of maintaining strong bank buffers and adopting a vigilant policy stance.
The Euro, utilized by the 20 member countries of the Eurozone, is the second most traded currency globally, accounting for roughly 31% of all foreign exchange transactions in 2022, with an average daily turnover exceeding $2.2 trillion. The EUR/USD pair is the most traded in the world, representing about 30% of all currency transactions.
The European Central Bank, headquartered in Frankfurt, plays a critical role in managing monetary policy for the Eurozone. Its primary objectives include maintaining price stability, which involves controlling inflation or stimulating economic growth. The primary tool at the ECB’s disposal is the adjustment of interest rates, where relatively high rates tend to bolster the Euro’s value.
Decisions regarding monetary policy are made by the ECB Governing Council, which convenes eight times a year, comprising heads of Eurozone national banks and six permanent members, including ECB President Christine Lagarde. Inflation data from the Eurozone, particularly measured through the Harmonized Index of Consumer Prices (HICP), serves as a vital metric for the Euro. A rise in inflation beyond the ECB’s 2% target typically compels the central bank to increase rates to restore balance.
Economic indicators such as GDP growth, Manufacturing and Services PMIs, employment figures, and consumer sentiment surveys are crucial for assessing the Euro’s strength. A robust economy not only attracts foreign investment but can also lead to higher interest rates set by the ECB, which would strengthen the Euro further. Conversely, weak economic data often translates to a decline in the Euro’s value.
Among the significant economic statistics impacting the Euro is the Trade Balance, which reflects the difference between export earnings and import expenditures. A positive Trade Balance indicates strong demand for a nation’s exports, thereby enhancing the currency’s value. Conversely, a negative balance could weaken the Euro, highlighting the complex interplay between trade dynamics and currency valuation.
