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EUR/USD drifts higher above 1.0950 ahead of German Industrial Production

  • EUR/USD trades firmer near 1.0985 in Tuesday’s early European session. 
  • ECB policymakers continue to set the stage for an easier policy stance.
  • Traders push back bets on aggressive Fed rate cuts in the November meeting. 

The EUR/USD pair extends its recovery to around 1.0985 on Tuesday during the early European trading hours. The major pair edges higher amid the modest weakening in the US Dollar (USD). However, the upside for EUR/USD might be limited as traders expect a smaller interest rate cut from the US Federal Reserve (Fed) in November. 

French Central Bank Chief François Villeroy de Galhau said on Monday that the European Central Bank (ECB) would cut interest rates next week as economic growth is weak and this raises the risk that inflation will undershoot its 2% target. The comments support market pricing for another 150 bp of ECB rate cuts over the next twelve months.

ECB Isabel Schnabel is set to speak later on Tuesday, and Industrial Production in Germany will be released. The dovish remarks from ECB policymakers or any sign of weakness in Europe's largest economy could drag the Euro (EUR) lower against the Greenback. 

On the USD’s front, the encouraging US jobs data on Friday raised the expectation that the Fed will cut 25 basis points (bps) at the central bank's November meeting. This, in turn, might lift the US Dollar (USD) broadly and might cap the upside for EUR/USD. The odds of a Fed rate cut of 25 bps stand at an 85% chance, up from 31.1% last week, according to the CME FedWatch Tool.

(This story was corrected on October 8 at 6:10 GMT to say that French Central Bank Chief François Villeroy de Galhau said on Monday, not Tuesday.)

Euro FAQs

The Euro is the currency for the 19 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%).

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.

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.

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.

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.

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Lallalit Srijandorn

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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