EUR/USD holds below 1.1150 amid cautious mood, all eyes on FOMC Minutes

EUR/USD edges lower to near 1.1120 in Wednesday’s Asian session.
The cautious sentiment lifts the US Dollar, but more dovish remarks from the Fed might cap its upside.
Investors will closely watch the FOMC Minutes on Wednesday for fresh catalysts.

Lallalit Srijandorn FXStreet

The EUR/USD pair loses momentum around 1.1120, snapping the three-day winning streak during the early European session on Wednesday. The cautious mood in the markets ahead of the July Federal Open Market Committee (FOMC) Minutes meeting minutes on Wednesday provides some support for the Greenback.

The FOMC kept the Federal Funds rate unchanged between 5.25%-5.50% at its July meeting. During the press conference, Fed Chair Jerome Powell noted that a rate cut could be on the table if inflation continues to ease. The dovish tone of the meeting drags the Greenback lower in the previous sessions. However, the cautious mood ahead of the key event boosts the safe-haven currency like the US Dollar (USD) and creates a headwind for EUR/USD.

On Friday, traders will shift their attention to Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium about further clues on the Fed’s plans. Financial markets have priced in nearly a 67.5% possibility of the Fed cutting interest rates by 25 basis points (bps) in September, according to the CME FedWatch Tool.

Across the pond, the European Central Bank (ECB) policymaker Olli Rehn said on Monday that the ECB may need to lower interest rates again in September due to persistent economic weakness. Rehn emphasized that the recent increase in negative growth risks in the euro area has supported the case for ECB rate cuts in the September meeting. Traders see a 90% odds of a 25 bps cut in the deposit rate to 3.5% in September and see at least one more move before the end of the year.

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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