EUR/USD remains stable ahead of the release of purchasing managers’ index data from the Eurozone and Germany. The US Dollar may struggle as the likelihood of further Fed rate cuts before the end of the year increases. ECB President Lagarde stressed that monetary policy needs to remain flexible.
EUR/USD is trading around 1.1160 during Asian trading hours on Monday. With the possibility of further interest rate cuts by the Federal Reserve in 2024 increasing, the US Dollar (USD) may weaken, which could support the EUR/USD pair.
The Federal Reserve cut interest rates by 50 basis points, more than usual, last week, bringing the benchmark interest rate to a range of 4.75% to 5.00%, and policymakers expect to cut rates by another 50 basis points (bps) by the end of the year.
But Federal Reserve Chairman Jerome Powell, speaking at a press conference after the meeting, said the Fed was in no rush to ease monetary policy and stressed that the half-percentage point cut was not a “new pace.”
Philadelphia Federal Reserve Bank President Patrick Harker said on Friday that the U.S. central bank has effectively navigated tough economic times in recent years. Harker likened monetary policy to driving a bus, saying it’s important to balance speed. He also stressed that achieving maximum employment requires not just the number of jobs, but the quality of jobs.
As for the euro, European Central Bank (ECB) President Christine Lagarde stressed in a speech on Friday that monetary policy needs to remain adaptable in an ever-changing world. According to Euronews, while the core objectives of monetary policy remain unchanged, particularly price stability, central banks must remain flexible to respond to the challenges of a rapidly changing global economy.
Traders are expected to closely monitor Eurozone and German Purchasing Managers’ Index (PMI) data due for release later in the day. The monthly PMIs act as leading indicators of business activity, providing insight into the health and trends of the economies.
(This story was corrected at 8:15 a.m. GMT on Sept. 23 to say in the second paragraph that policymakers expected an additional 50 basis points (bps) of rate cuts by the end of the year, not 75 bps.)
Frequently asked questions about the Euro
The Euro is the currency of 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world after the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion. EUR/USD is the most traded currency pair in the world, accounting for approximately 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB’s main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries usually benefit the euro, as they make the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone’s four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone’s economy.
Another important piece of data about the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only increase in value due to the additional demand it generates from foreign buyers looking to purchase these goods. So a positive trade balance makes a currency stronger, and a negative one makes it stronger.
