EUR/USD climbs as Fed cut bets weigh on US Dollar
- Euro rebounds from 1.1716 to 1.1763 as markets fully price 25 bps September Fed cut, slim odds for 50 bps.
- US Retail Sales expected weaker in August, while Industrial Production slowdown adds to pressure on Greenback.
- Eurozone focus turns to ECB’s Escriva speech, Italy Inflation, ZEW Surveys, and bloc-wide Industrial Production data.
EUR/USD advanced over 0.21% on Monday as market participants shrugged off the downgrade to French’s sovereign credit rating, as political turmoil remains. Nevertheless, expectations of the first rate cut in nine months of the Federal Reserve, downward pressured the US Dollar. The pair trades at 1.1763 after bouncing off daily lows of 1.1716.
Euro rises 0.21% after shrugging off France downgrade, traders focused on Fed, US data, and ECB speakers
Financial markets narrative hasn’t changed with the Federal Open Market Committee (FOMC) meeting right around the corner. Money markets had fully priced in a 25-basis points rate cut by the Fed, with a slim chance of a “jumbo size” 50 bps cut, as depicted in Prime Market Terminal interest rate probability tool.
Besides this, the US economic docket will face the release of Retail Sales data on Tuesday, with estimates suggesting that sales dipped in August. Additionally, the Fed is expected to announce that Industrial Production continued to slow down in August.
Across the pond, the docket will feature a speech by European Central Bank (ECB) member Jose Luis Escriva. Data-wise, traders will eye Italy’s inflation print, the ZEW Survey in Germany and the Eurozone for September, and Industrial Production for the Euro area.
Daily market movers: Euro boosted by ECB’s Schnabel comments
- EUR/USD extended its gains, despites Fitch France’s sovereign credit rating from AA- to A+ due to a political deadlock expected after elections. It was also boosted by ECB’s Isabel Schnabel comments that “interest rates are in a good place as inflation stabilizes around our 2% target, and the economy remains resilient at full employment.”
- US Retail Sales are projected to slow in August, rising 0.3% MoM versus 0.5% previously, which may further pressure DXY downward.
- Industrial Production for the same month is expected to drop -0.1% MoM, a tenth lower from the previous month print.
- The US Dollar Index (DXY), which measures the greenback against a basket of six peers, is down 0.28% at 97.34.
- Fitch Ratings Agency expects two 25 basis rate cuts, each in September and December, with three more reductions penciled in 2026. Conversely, the ratings agency does not project any rate cuts by the European Central Bank (ECB) again.
- Across the pond, the European Central Bank (ECB) held rates unchanged, adopting a meeting-by-meeting and data-dependent approach, while not pre-committing to a set path on interest rates.
Technical outlook: EUR/USD stays firm above 1.1750, eyes on 1.1800
EUR/USD uptrend remained intact on Monday, though the pair is shy of cracking the latest cycle high hit on September 9 at 1.1779. This could open the path to challenge 1.1800, setting the stage to test the year-to-date (YTD) high of 1.1829.
On the flip side, if EUR/USD slides below 1.1750, sellers could drive the exchange rate to 1.1700. A breach of the latter will expose the 20-day SMA at 1.1688 and the 50-day SMA at 1.1660.
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.