EUR/USD declines below 1.1500 as markets await Fed, ECB rate decisions

EUR/USD softens to near 1.1490 in Tuesday’s early European session.
The Fed is likely to leave the interest rates unchanged at its March meeting on Wednesday.
The ECB is expected to keep its deposit rate steady on Thursday.

Lallalit Srijandorn FXStreet

The EUR/USD pair trades in negative territory around 1.1490 during the early European session on Tuesday. The US Dollar (USD) strengthens against the Euro (EUR) as surging oil prices due to the US and Israel's war on Iran have made traders more worried about inflation, triggering a sharp repricing of Federal Reserve (Fed) rate outlooks. The Fed and the European Central Bank (ECB) interest rate decisions will be in the spotlight later this week.

The US central bank is expected to keep its benchmark interest rate unchanged in the current range of 3.50% to 3.75% when it concludes its two-day meeting on Wednesday. Rising oil prices since the start of the Iran war have led analysts to push back their rate cut expectations. Goldman Sachs economists dialed back Fed rate reduction bets in June based on “a higher inflation path.” They predicted cuts in September and December, versus June and September previously.

On the Euro front, the ECB is anticipated to hold its benchmark deposit rate steady at 2.0% at its March meeting on Thursday. Nonetheless, ECB Governing Council member Peter Kazimir suggested policymakers could opt for a hike in rates sooner than expected.

Interest rate futures are fully pricing a rate hike by the end of July and about a 55% probiability of a second one by the end of December. But economists polled by Reuters March 9-13 stuck to their long‑held view of steady rates.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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