- EUR/USD was trading sideways around the 1.1120 level in early European session on Thursday.
- At its September meeting, the Fed cut interest rates by 50 basis points, setting a new target range for interest rates of 4.75% to 5.00%.
- The euro area's annual HICP stabilized at 2.2% in August, as expected.
The EUR/USD pair traded sideways in the early hours of the European session on Thursday. The major pair initially rose to a monthly high of 1.1189 before dropping to around 1.1120 after the Federal Reserve delivered a significant interest rate cut at its September meeting.
The Federal Open Market Committee (FOMC) began an easing cycle on Wednesday, lowering the target range for the federal funds rate by 50 basis points (bps) to 4.75% to 5.00%. However, the Fed's forward guidance appeared to be less dovish than expected, helping to limit the decline of the US Dollar (USD).
Fed Chairman Jerome Powell said, “The neutral interest rate now appears to be significantly higher than it was before the pandemic.” The median long-term interest rate rose to 2.9% from 2.8%, with seven participants seeing long-term rates at 3.25% or higher. The median forecast for the unemployment rate through the end of 2024 was revised to 4.4%, down from a 4.0% forecast in June. Chairman Powell reiterated in his press conference that the job market is now properly normalizing and policymakers do not welcome a further slowdown.
According to data released by Eurostat, the euro zone's Highest Inflation Price Index (HICP) rose 2.2% year-on-year in August, in line with expectations and the previous 2.2% increase, while core HICP inflation was stable at 2.8% year-on-year in August, in line with expectations.European Central Bank (ECB) policymaker Joachim Nagel said on Wednesday that euro zone inflation is not as low as the ECB would like and that interest rates need to be kept high enough to eliminate price pressures.
Looking ahead, ECB Governing Council member Isabel Schnabel is due to speak later in the day, while the US will see the release of weekly jobless claims, the Philadelphia Fed manufacturing index and existing home sales.
Frequently asked questions about the Euro
The euro is the currency of 20 European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, Accounted for With 31% of all foreign exchange trading and an average daily volume of over $2.2 trillion, EUR/USD is the most traded currency pair in the world. accounting All trades are off around 30% followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB's main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB's main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB's target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries usually benefit the euro, as they make the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone's four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone's economy.
Another important piece of data about the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only increase in value due to the additional demand it generates from foreign buyers looking to purchase these goods. So a positive trade balance makes a currency stronger, and a negative one makes it stronger.
