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EUR/USD moves below 1.1700, downside seems limited due to dovish Fed tone

  • EUR/USD could recover as the dovish tone surrounding the Fed’s September policy outlook persists.
  • US economic data continue to support the case for a Federal Reserve rate cut in September.
  • President Trump said that Ukraine should pursue a deal to bring an end to its war with Russia.

EUR/USD edges lower after registering around 0.5% gains in the previous session, trading around 1.1690 during the Asian hours on Monday. However, the pair may further regain its ground as the US Dollar (USD) could struggle, driven by prevailing dovish tone surrounding the US Federal Reserve’s (Fed) policy outlook for September. Traders will likely observe the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) data due on Thursday.

US economic data keep the case for a September Federal Reserve (Fed) interest rate cut intact. Michigan Consumer Sentiment Index fell to 58.6 in August from 61.7 in July, falling short of the expected 62.0 reading. Meanwhile, the US Retail Sales increased by 0.5% on a monthly basis in July, compared to a rise of 0.9% seen in June. This reading came in line with the market consensus.

Money markets are now pricing in nearly a 93% odds of a 25 basis points (bps) Fed rate cut in September, according to the CME FedWatch tool.

The Trump administration has broadened its 50% tariffs, take effect August 18, on steel and aluminum imports to include 407 new product codes to the US Harmonized Tariff Schedule. President Trump also told reporters he intends to issue further announcements on steel tariffs, along with new levies aimed at semiconductor imports.

US President Donald Trump said Saturday that Ukraine should seek a deal to end the war with Russia, arguing that “Russia is a very big power, and they’re not.” His remarks followed reports from a recent summit in Alaska that Russian President Vladimir Putin had demanded additional Ukrainian territory, per Reuters.

Traders will likely watch upcoming inflation data from Eurozone (EU) and Germany, which could influence the case that the European Central Bank (ECB) can pause its easing cycle.

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.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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