Euro edges lower to near 1.1450 as Fed holds rates steady, traders await Eurozone and German GDP
- EUR/USD posts modest losses near 1.1465 in Thursday’s early Asian session.
- While the Fed held rates steady at the July meeting, Warsh pledged that the central bank would take action on inflation if needed.
- The preliminary readings of the Eurozone and German GDP for Q2 are due later on Thursday.
The EUR/USD pair trades with mild losses around 1.1465 during the early Asian session on Thursday. The US Dollar (USD) edges higher against the Euro (EUR) on a hawkish Federal Reserve (Fed) rate hold. Traders brace for the preliminary readings of the Gross Domestic Product (GDP) for the second quarter (Q2) from Germany and the Eurozone.
The Fed opted to leave interest rates unchanged in the 3.5%-3.75% range at its July policy meeting on Thursday. Though markets widely expected the US central bank to stay on hold, Dallas Fed President Lorie Logan, Cleveland’s Beth Hammack, and Minneapolis Fed chief Neel Kashkari dissented in favor of raising rates by 25 basis points (bps).
During the press conference, Fed Chairman Kevin Warsh said that while the Fed won’t provide hints on where rate policy is heading, it will take necessary steps to meet its 2% inflation target.
The Eurozone and Germany’s GDP data will be in the spotlight later on Thursday. Economists estimate the Eurozone GDP to show a modest 0.2% QoQ expansion in Q2 following a contraction of 0.2% in the previous reading. Germany's GDP is projected to grow 0.1% QoQ in Q2, versus 0.3% prior. If the reports show stronger-than-expected outcomes, this could lift the shared currency in the near term.
The European Central Bank (ECB) policymaker Peter Kazimir said on Monday that the central bank will need to raise interest rates at least once more to contain inflation, and a deterioration in the outlook could warrant more tightening than now expected. Financial markets see at least two more rate hikes from the ECB, with the first move fully priced in by October and the second by March, according to Reuters.
Fed seen delivering hawkish hold as markets price in year-end hike
Commerzbank’s Antje Praefcke expects that “in all likelihood, this overall situation should lead to a ‘hawkish hold’ this evening,” with the FOMC under Chair Kevin Warsh keeping rates unchanged but maintaining a tightening bias. She notes that “the market expects at least one interest rate hike from the Fed by the end of the year and sees a chance that more could follow next year as well.” While investors “do not want to completely rule out an interest rate hike even today,” Commerzbank stresses that the market “sees only a low probability for this to happen,” leaving the US Dollar and EUR/USD particularly sensitive to any shift in the perceived path of Fed policy.
Euro FAQs
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%).
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.
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.
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.
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.
