- EUR/USD could lose ground amid risk aversion ahead of President-elect Donald Trump’s inauguration on Monday.
- Traders remain cautious amid uncertainty surrounding Trump’s policy pledges, including imposing tariffs, extending tax cuts, and deporting illegal immigrants.
- The Euro struggles as markets anticipate a 25 basis point rate cut at the next four ECB policy meetings.
EUR/USD recovers some of its losses from the previous session, trading near 1.0280 during Asian hours. However, the pair's upside may remain capped as the US Dollar (USD) could strengthen due to market caution ahead of President-elect Donald Trump’s inauguration later on the day. The US market will remain closed on Monday for the Martin Luther King Jr. Day holiday.
Concerns over Trump’s policy pledges—such as imposing tariffs, extending tax cuts, and deporting illegal immigrants—have fueled an increase in US Treasury yields and supported the US Dollar ahead of his swearing-in. Analysts suggest that the US Federal Reserve's (Fed) future interest rate trajectory will hinge on the extent to which the Trump administration implements these policies.
Investors will be closely watching Trump’s planned executive orders, expected to be issued shortly after he takes office. Meanwhile, the Fed is widely anticipated to keep interest rates steady at its January meeting, with a majority of economists polled by Reuters forecasting a resumption of rate hikes in March.
The Euro (EUR) faces headwinds as dovish expectations for the European Central Bank (ECB) persist. Markets are pricing in a 25 basis point (bps) interest rate cut at each of the next four ECB policy meetings, reflecting concerns over the Eurozone's economic outlook and the expectation that inflationary pressures will remain under control.
The ECB's December meeting minutes, released last week, suggested that policymakers focused more on the pace of policy easing this year rather than pausing or ending the rate cut cycle. Notably, officials debated the possibility of a larger-than-usual 50 bps rate cut to safeguard against downside risks to growth, which are being compounded by both global and domestic political uncertainties.
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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