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19 Dec 2024
EUR/USD remains on the defensive below 1.0400 on hawkish Fed rate cut
- EUR/USD edges lower to 1.0370 in Thursday’s Asian session.
- The Fed cut its federal funds rate by 25 bps, lowering the rate to a range of 4.25% to 4.50%.
- The dovish remarks from the ECB weigh on the Euro.
The EUR/USD pair weakens to near 1.0370 during the Asian trading hours on Thursday. The hawkish rate cut by the US Federal Reserve (Fed) lifts the US Dollar (USD) and drags the major pair lower. Later on Thursday, the US weekly Initial Jobless Claims, Existing Home Sales, and final reading of Gross Domestic Product Annualized for the third quarter (Q3) will be released.
As widely expected, the Fed delivered a hawkish cut of 25 basis points (bps) at its December meeting on Wednesday, bringing its benchmark lending rate to a range of 4.25%-4.50%, a two-year low. The Summary of Economic Projections, or ‘dot-plot,’ showed only two rate cuts in 2025, down from the four they projected in September.
During the Press Conference, Fed Chair Jerome Powell made clear that the Fed is going to be cautious about further cuts as inflation remains stubbornly above the central bank’s 2% target. The expectation of a slower pace of Fed rate reductions next year provides some support to the Greenback against the Euro (EUR).
Across the pond, investors expect the European Central Bank (ECB) to cut the interest rates at every meeting until June 2025 as policymakers are concerned about growing economic risks in the Eurozone. The expectation of aggressive rate reductions by the ECB might continue to undermine the shared currency.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can 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 does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.