EUR/USD trades weakly near 1.1850 as Warsh's nomination boosts USD's appeal
- EUR/USD struggles around 1.1850 as the US Dollar trades broadly firm.
- Warsh’s appointment as the new Fed Chairman has boosted the US Dollar.
- Investors await the flash Eurozone HICP and the US NFP data for January.
The EUR/USD pair holds onto Friday’s losses near 1.1850 during the late Asian trading session on Monday. The major currency pair faces selling pressure as the US Dollar (USD) trades firmly, following the nomination of former Federal Reserve (Fed) Governor Kevin Warsh as the successor of current Chairman Jerome Powell.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near the weekly high of 97.33.
There has been a significant positive impact of Warsh’s appointment as the Fed’s new Chairman on the US Dollar, given his historical preference for a strong US Dollar.
This week, the US Dollar is expected to trade highly volatile as a string of employment-related and ISM Purchasing Managers’ Index (PMI) data are due for release, notably the Nonfarm Payrolls (NFP) data, which is scheduled for Friday.
Meanwhile, the major trigger for the Euro (EUR) will be the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for January, which will be published on Wednesday. The headline HICP is expected to come in lower at 1.7% on an annualized basis from the prior release of 1.9%. Signs of price pressures cooling down would boost expectations of an interest rate cut by the European Central Bank (ECB) in the near term.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
