EUR/USD extends its recovery above 1.0800 amid Fed September rate cut signal
- EUR/USD trades in positive territory for the second consecutive day around 1.0835 in Thursday’s early Asian session.
- Fed left interest rate unchanged on Wednesday, but Chair Jerome Powell signalled that the Fed's September meeting could lead to cuts.
- Eurozone inflation edges up to 2.6% YoY in July.
The EUR/USD pair rebounds to nearly 1.0835 during the Asian session on Thursday. The weaker US Dollar (USD) broadly after the Federal Reserve (Fed) interest rate decision provides some support to the major pair. The US ISM Manufacturing PMI data for July will be the highlight on Thursday.
The Fed held its benchmark interest rates steady in a range of 5.25%-5.50% on Wednesday, a 23-year high, as widely expected. The Fed funds rate has been at this level since July 2023 as part of the Fed’s work to tame inflation back to the Fed’s target.
With "some further" progress on inflation, Fed Chair Jerome Powell said that a September cut "could be on the table.” This, in turn, has exerted some selling pressure on the USD and created a tailwind for EUR/USD.
Across the pond, inflation in the eurozone rose again in July, raising doubt on potential European Central Bank (ECB) interest rate cuts in September. Data released on Wednesday by Eurostat showed that the preliminary estimates of the Harmonised Index of Consumer Prices (HICP) in the Eurozone rose by 2.6% YoY in July, compared to 2.5% in the previous month. This figure exceeded the estimation of 2.4%. In response to the data, the Euro attracts some buyers as traders reconsider the probability that the ECB will cut interest rates at its meeting on September 14.
Euro FAQs
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%).
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.
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.
