- EUR/USD gained momentum in Wednesday's Asian session to around 1.0505.
- The US Federal Reserve is expected to cut interest rates for the third time in a row at its December meeting on Wednesday.
- Rising expectations for further interest rate cuts from the ECB could cause the euro to fall.
In early European trading on Wednesday, the EUR/USD pair remained in positive territory around 1.0505. However, the cautious mood ahead of the Federal Reserve's interest rate-setting meeting could weigh on risk assets such as the euro (EUR).
The Fed is widely expected to cut borrowing costs by 25 basis points (bps) and cut the overnight borrowing rate by half a percentage point from the current 4.50% range to 4.25% to 4.50% at its December meeting on Wednesday. % and 4.75%. All eyes will turn to the Fed's latest economic forecasts and dot plots, which could provide some hints about the likely trajectory of interest rates through 2025 and 2026. Any signs that the Fed is more cautious about rate cuts in the future could cause the dollar to strengthen against the euro. (EUR).
Across the pond, European Central Bank (ECB) President Christine Lagarde said on Monday that further interest rate cuts were likely. “The policy direction is clear and we expect interest rates to be lowered further,” Lagarde said. Additionally, ECB Governing Council member Oli Rehn said interest rates would continue to fall as inflation begins to stabilize around the 2% target. Isabel Schnabel, the ECB's most influential policy hawk, said markets are betting that borrowing costs will be lowered further in the euro zone as the economy stagnates and concerns about high inflation fade. did.
However, the pace and size of rate cuts will be determined at each meeting based on available data and comprehensive analysis. This could limit the upside of major currency pairs in the short term.
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, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world, accounting for an estimated 30% of all trades, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%). ) and so on.
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. This could not only attract more foreign investment but 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.
