The EUR/USD pair is trading at approximately 1.1720 during the Asian hours on Friday, managing to hold its ground after experiencing two consecutive days of losses. Market participants are keenly awaiting the release of the HCOB Purchasing Managers’ Index (PMI) data from both the Eurozone and Germany later in the day, alongside the Eurozone Producer Price Index (PPI), which are expected to provide key insights into the region’s economic health.
European Central Bank (ECB) policymaker Martins Kazaks emphasized on Thursday that the current level of interest rates is deemed “very appropriate” and that there is room to keep them unchanged. He highlighted the prevailing uncertainty in the macroeconomic environment, underscoring the necessity for flexibility in monetary policy.
Meanwhile, the US Dollar is seeing an upward trend, driven in part by traders’ growing concerns regarding the ongoing partial government shutdown in the United States. The shutdown has raised apprehensions about potential delays in significant U.S. economic reports, including the critical September Nonfarm Payrolls (NFP) report. Key indicators from the services sector, including the US ISM Services PMI and the final S&P Global Services PMI, are also scheduled for release later on Friday.
The shutdown, projected to persist into the coming week, has prompted Senate Democrats to prepare for another vote against a GOP-backed short-term funding bill. Observers note that the Senate is unlikely to convene over the weekend, adding to the uncertainty surrounding U.S. fiscal policy.
In domestic markets, the perceived weakness in the U.S. labor market has increased speculation regarding potential Federal Reserve rate cuts. According to the CME FedWatch Tool, there is now a 97% likelihood of a rate cut occurring in October and a 91% chance of another reduction in December.
The ECB plays a crucial role in managing the Eurozone’s monetary policy, primarily focusing on price stability, with a target inflation rate of around 2%. The central bank’s main tool for achieving this objective is through adjusting interest rates. A rise in interest rates usually strengthens the Euro, while lower rates tend to have the opposite effect.
Monetary policy decisions are made by the ECB Governing Council, which meets eight times a year. This council consists of the heads of Eurozone national banks and six permanent members, including ECB President Christine Lagarde.
In extreme scenarios, the ECB may resort to Quantitative Easing (QE), a policy that enables the central bank to increase money supply by purchasing assets, typically government or corporate bonds. This usually results in a weaker Euro and is employed as a last resort when traditional interest rate adjustments are ineffective.
Conversely, Quantitative Tightening (QT) is employed once economic recovery is underway and inflation begins to rise. During QT, the ECB halts bond purchases and ceases reinvesting the principal repayments from maturing bonds, which is generally positive for the Euro.
