- Early in Tuesday's European session, EUR/USD held steady around 1.0985.
- ECB policymakers continue to prepare for an accommodative policy stance.
- Traders have withdrawn their bets that the Fed will cut rates aggressively at its November meeting.
EUR/USD extended its recovery to around 1.0985 in early European trading on Tuesday. Major currency pairs are rising while the US dollar (USD) is slowly declining. However, EUR/USD upside could be limited as traders expect a modest interest rate cut by the US Federal Reserve in November.
The European Central Bank (ECB) will cut interest rates next week as economic growth weakens and there is a growing risk that inflation will fall below its 2% target, Bank of France Governor François Villeroy-Degaleau said on Tuesday. The comments confirm market expectations that the ECB will cut interest rates by another 150 basis points over the next 12 months.
ECB's Isabel Schnabel is scheduled to speak later on Tuesday, and German industrial production will also be announced. Dovish comments from ECB policymakers and signs of weakness in Europe's largest economy could cause the euro (EUR) to weaken against the US dollar.
As for the U.S. dollar, Friday's strong U.S. jobs report raised expectations that the Fed will cut interest rates by 25 basis points (bps) at its November central bank meeting. This could lead to a broad-based rally in the US dollar (USD) and limit upside to the EUR/USD. According to the CME FedWatch tool, there is an 85% chance that the Fed will cut interest rates by 25 basis points, up from 31.1% last week.
Euro Frequently Asked Questions
The euro is the currency of the 19 European Union countries that belong to the euro area. It is the second most traded currency in the world after the US dollar. In 2022, Accounted for It accounts for 31% of all foreign exchange transactions and has an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world. accounting An estimated 30% discount on all transactions, 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 of the euro area. The ECB sets interest rates and controls monetary policy. The ECB's main task is to maintain price stability, which means controlling inflation or stimulating growth. The main means of doing so is raising or lowering interest rates. Relatively high interest rates, or expectations of rising interest rates, usually benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including Christine Lagarde, president of the ECB.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially above the ECB's 2% target, the ECB will mandate interest rate hikes to rein in inflation. Relatively high interest rates compared to other countries typically benefit the euro, as it makes the region more attractive to global investors as a place to park their funds.
The data release will gauge the health of the economy and could have an 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 would that attract more foreign investment, but it could also prompt the ECB to raise interest rates, which could directly lead to a stronger euro. Otherwise, if economic indicators are weak, the euro is likely to weaken. Economic data for the euro area's four largest economies (Germany, France, Italy and Spain) is particularly important, as they account for 75% of the euro area economy.
Another important data regarding 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 highly sought-after export goods, the value of its currency increases purely due to the additional demand generated from foreign buyers seeking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
