The EUR/USD exchange rate increased by over 0.59% on Wednesday following the Federal Reserve’s anticipated interest rate cut, creating what traders perceived as a “dovish hold.” This prompted many to move away from the dollar and purchase euros instead. Currently, the pair is trading close to a daily high of 1.1695 after recovering from a low of 1.1620.
With Mr. Powell’s signals fading, the dollar weakens while the euro gains strength.
The Fed opted for a 25 basis point reduction in interest rates, although three members, including Governor Stephen Milan, argued for a larger cut of 50 basis points. Meanwhile, two regional Fed presidents, Jeffrey Schmidt and Austan Goolsby, voted to keep rates steady.
The monetary policy announcement didn’t change much, specifically addressing employment risks that still tilt toward the downside as inflation continues to rise. In a press conference, Fed Chairman Jerome Powell recognized this ongoing tension between the dual objectives of the central bank.
Meanwhile, in the euro zone, there were no notable updates, though ECB member Makhlouf expressed confidence that inflation would reach 2% in the medium term, as reported by Bloomberg.
Earlier, ECB President Christine Lagarde stated that monetary policy was on solid ground, indicating that the ECB might update its outlook positively in December.
Market Overview: Euro strengthens as Dollar Weakness Grows
- The dollar index (DXY) dropped by 0.58% to 98.68 amid a significant weakening of the US dollar against major currencies.
- Powell mentioned that the central bank is well-positioned to “wait and see” how the economy unfolds after a total of 75 basis points of easing this year. He noted that the federal funds rate is nearing the upper end of a neutral estimate and would await economic data that might be “distorted.”
- “We’ve adjusted policy to a point that isn’t very restrictive at present,” Powell said following the 175 basis point rate cut, adding that the Federal Reserve is in a neutral range to some extent.
- The Summary of Economic Projections (SEP) presents a “dot plot” indicating that most members anticipate the federal funds rate will be around 3.4% next year, hinting at a possible 25 basis point cut. Policymakers are forecasting the neutral rate to approach 3% in the long term starting in 2028.
Technical Insights: EUR/USD Trends Below 1.1650, Watching FOMC Meeting
EUR/USD has consistently remained around 1.1650 for the past six sessions, creating a narrow consolidation band between 1.1650 and 1.1600. While there’s a bullish momentum evident from the Relative Strength Index (RSI), buyers need to reclaim 1.1700 to challenge higher levels like 1.1800 and the year-to-date peak of 1.1918.
If the pair slips below 1.1650, the 50-day simple moving average (SMA) is positioned around 1.1604. A significant break beneath this zone could expose the 20-day SMA at 1.1599, and subsequently the psychological level at 1.1500.
(This article was corrected on Dec. 10, 19:00 GMT, to amend the date of the Fed meeting in the first bullet point and to fix the last name of Fed Director Christopher Waller.)
Euro FAQs
The euro is used by 20 countries in the European Union that are part of the euro area. It’s the second most traded currency globally, following the US dollar. In 2022, it made up 31% of all foreign exchange transactions, with an average daily trading volume exceeding $2.2 trillion. The EUR/USD pair is the most frequently traded globally, accounting for about 30% of trades.
The European Central Bank (ECB), based in Frankfurt, Germany, serves as the reserve bank for the euro area. It sets interest rates and manages monetary policy, focusing on maintaining price stability, which primarily involves controlling inflation or promoting growth. Interest rates are adjusted to meet these goals, and usually, higher rates or expectations of rising rates boost the euro’s value.
Inflation data in the Eurozone, tracked by the Harmonized Index of Consumer Prices (HICP), is a significant indicator for the euro. If inflation rises unexpectedly, particularly above the ECB’s 2% target, it is likely to prompt interest rate hikes to control it. Higher interest rates relative to other nations generally strengthen the euro.
Economic data releases can reflect the health of the economy and impact the euro. Indicators such as GDP, manufacturing and services PMIs, employment statistics, and consumer sentiment surveys all affect its direction. A strong economy typically draws foreign investment, which could incentivize the ECB to raise rates, leading to a stronger euro. Conversely, weak economic indicators could weaken the currency.
Another crucial data point is the trade balance, which measures the difference between export earnings and import expenditures. When a country produces in-demand export goods, currency value increases due to heightened demand from foreign buyers. Thus, a positive trade balance strengthens the currency, while a negative one has the opposite effect.
