- The euro/dollar pair is rising as traders expect the ECB to delay further interest rate cuts following recent rises in inflation.
- ECB's Holzmann said President Trump's tariffs would not only lead to slower overall growth but also create inflationary pressures.
- The latest FOMC dotplot predicts only two rate cuts, down from the previously expected four.
EUR/USD rose for the third day in a row and was trading around 1.0430 in Asian time on Monday. The pair's rise can be attributed to comments from European Central Bank (ECB) Board member Robert Holzmann.
ECB President Holzmann said on Saturday that the central bank's next interest rate cut could be a long one, given the recent rise in inflation, according to Reuters. He also said, “At this point, we don't expect a rate hike.” “One possible scenario is that President Trump's tariffs not only lead to slower overall growth, but also cause inflationary pressures.”
Furthermore, EUR/USD upside potential may be limited as markets continue to digest the US Federal Reserve's hawkish shift. The Fed cut its benchmark interest rate by a quarter of a point at its December meeting, and the latest dot plot suggests two cuts next year.
But Fed Chairman Jerome Powell said earlier this month that Fed officials “will be cautious about cutting rates further,” following an expected quarter-point rate cut. The Fed's hawkish message supports the US dollar (USD) and is likely to be a headwind for EUR/USD in the short term.
Economists widely expect President-elect Donald Trump to implement tax cuts, tariffs and deregulation that will spur inflation. This could cause the US central bank to adjust its outlook for next year.
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.
