- EUR/USD holds its key support of 1.1000 as the Fed looks set to cut interest rates in September.
- Moderate growth in the US CPI in July boosted confidence that inflation remains on track to reach the bank’s target of 2%.
- The ECB is expected to avoid cutting interest rates aggressively.
The EUR/USD pair trades in a tight range above the psychological support of 1.1000 in Thursday’s European session. The major currency pair faces slight profit-booking after posting a fresh more than seven-month high at 1.1050.
However, the near-term outlook of the major remains firm as the Federal Reserve (Fed) is widely anticipated to rollback its restrictive monetary policy stance in September, which it has been maintaining since March 2022.
The United States (US) Consumer Price Index (CPI) data for July, released on Wednesday, boosted the confidence of investors that the Fed will cut interest rates in September as it showed that price pressures are on track to return to the desired rate of 2%. Annual core CPI, which excludes volatile food and energy prices and is one of the most tracked inflation measures by Fed policymakers, rose expectedly by 3.2% against the prior release of 3.3%. In the same period, the headline CPI decelerated to 2.9%, from the estimates and the prior release of 3%.
As Fed rate cuts have taken the central stage, market sentiment has become favorable for risky assets. S&P 500 futures have posted decent gains in the European session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers above THE weekly low of 102.27.
Meanwhile, investors await the US Retail Sales data for July, which will be published at 12:30 GMT. The Retail Sales data, a key measure of consumer spending, is estimated to have grown by 0.3% after remaining flat in June.
On the Eurozone front, the Euro (EUR) remains broadly firm as investors expect that the European Central Bank (ECB) will extend the policy-easing cycle with a calibrated approach. ECB policymakers have been refraining from committing a pre-defined interest-rate cut path to avoid risks of reacceleration in price pressures.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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