EUR/USD posts modest gains above 1.1700 as US government shutdown weighs on US Dollar

EUR/USD trades with mild gains around 1.1735 in Thursday’s Asian session.
Traders pondered the length of the US government shutdown and its effect on economic data releases.
Fed Governor Cook to stay in her job until January.

Lallalit Srijandorn FXStreet

The EUR/USD pair gains ground near 1.1735 during the Asian trading hours on Thursday. The concern over the impact of the US government shutdown undermines the US Dollar (USD) against the Euro (EUR). The US weekly Initial Jobless Claims will not be published in light of the ongoing federal shutdown.

The US federal government shut down on Wednesday after a deadlocked Congress failed to reach a deal on funding. Government agencies warned this would halt the release of the closely watched September employment report, among other things. The US President Donald Trump administration on Wednesday froze $26 billion for Democratic-leaning states, following through on a threat to use the shutdown to target Democratic priorities.

Markets expect further policy easing at the Fed’s October meeting to be a lock, with Fed funds futures implying a 99.4% chance of a 25-basis-point (bps) cut, up from 96.2% a day earlier, according to the CME FedWatch tool.

The US Supreme Court said on Thursday that it would hear arguments in January over Trump's attempt to remove Fed Governor Lisa Cook, leaving her in the post for now. Easing concerns about the Fed’s independence might help limit the USD’s losses in the near term. Market concern about the Fed's independence now "moves to the backburner for the next few months," said Tony Sycamore, market analyst at IG in Sydney.

The European Central Bank (ECB) President Christine Lagarde said there are no serious threats to the outlook for euro-area inflation but that officials must remain vigilant. Her remarks indicated that the ECB is in no rush to lower borrowing costs further. This, in turn, supports the shared currency against the USD.

Euro FAQs

What is the Euro?

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%).

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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