EUR/USD posts modest gains above 1.1700 as ECB signals pause

EUR/USD trades with mild gains near 1.1710 in Monday’s early Asian session.
The European Central Bank signaled it was done with monetary easing.
The Fed cut policy rates by 25 bps at its December meeting, its third consecutive reduction.

Lallalit Srijandorn FXStreet

The EUR/USD pair posts modest gains around 1.1710 during the early Asian session on Monday. The Euro (EUR) strengthens against the Greenback after the European Central Bank (ECB) left its policy rates unchanged and took a more positive view on the Eurozone economy, which has shown resilience to global trade shocks. Financial markets are likely to remain subdued as traders book profits ahead of the long holiday period.

The ECB kept its key policy rates on hold at 2.0% since June, and its latest pause last week also came with upgrades to growth and inflation forecasts. Traders expect a lengthy rate pause until at least June after ECB President Christine Lagarde cited heavy uncertainty and avoided forward guidance. Signals that the rate cut cycle is ending could provide some support to the shared currency against the US Dollar (USD) in the near term.

Across the pond, the Federal Reserve (Fed) delivered a widely expected 25 basis-point (bps) rate cut in December, bringing the federal funds rate to 3.50-3.75%. Fed Chair Jerome Powell signaled that a rate hike is not likely in the near future and that the US central bank is in a "wait-and-see" mode to assess incoming economic data.

The Summary of Economic Projections, or so-called "dot plot," indicated a median expectation of only one additional rate cut in 2026. Nonetheless, markets are now pricing in expectations for potentially two or more rate cuts next year, according to the CME FedWatch tool. This, in turn, could undermine the USD and act as a tailwind for the major pair.

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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