EUR/USD weakens below 1.1150 ahead of Eurozone/US PMI data
- EUR/USD loses ground around 1.1145 in Wednesday’s Asian session.
- Fed officials noted the central bank might cut interest rates in September if inflation continued to cool.
- The ECB is anticipated to resume its easing cycle in September.
The EUR/USD pair trades with mild losses near 1.1145, snapping the four-day winning streak during the Asian session on Thursday. The downside of the major pair is likely to be limited amid firmer expectations that the US Federal Reserve (Fed) will start easing its monetary policy in September. Later on Thursday, the preliminary Purchasing Managers’ Index (PMI) for August from the Eurozone and the US will be released.
The minutes of the Fed’s July 30-31 meeting released Wednesday suggested that most Fed officials agreed last month that they would likely cut their interest rate at their next meeting in September as long as inflation continued to cool. Atlanta Fed President Raphael Bostic said, “We might need to shift our policy stance sooner than I would have thought before.”
The Fed Chair Jerome Powell’s speech at Jackson Hole could offer some hints about the interest rate path in the US. Markets expect Powell will signal on Friday that inflation is on course to the Fed's 2% target. Any dovish remarks from Fed officials might exert some selling pressure on the Greenback and create a tailwind for EUR/USD.
Across the pond, the European Central Bank (ECB) policymakers refrained from committing to a specific path for interest rate cuts, citing expectations that inflation in the Eurozone would remain near its current levels for the remainder of the year. Nonetheless, ECB policymaker Olli Rehn said on Monday that the ECB may need to lower interest rates again in September due to persistent economic weakness. The markets have priced in nearly a 90% chance of a 25 basis points (bps) cut in the deposit rate to 3.5% in September and see at least one more move before the end of the year.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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.
