EUR/USD edges higher as US Dollar trades cautiously ahead of FOMC minutes
- EUR/USD is slightly up as the US Dollar trades with caution even though President Trump has threatened to impose 25% tariffs on a few items.
- The Fed is expected to keep interest rates steady for longer.
- Firm ECB dovish bets would continue to cap the Euro’s upside.
EUR/USD ticks higher to near 1.0460 in Wednesday’s European session as the US Dollar (USD) struggles to extend recovery despite multiple tailwinds. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 106.90. On Tuesday, the DXY Index advanced to near 107.10 after recovering from its two-month low of 106.50, which it posted on Friday.
The Greenback struggles for more upside even though fears of United States (US) President Donald Trump’s tariffs have renewed. On Tuesday, President Trump announced that he plans to impose 25% tariffs on automobiles, semiconductors, and pharmaceuticals and that duties will increase further next year. He didn’t provide a clear timeline for when these tariffs will come into effect but said that some of them will be enacted by April 2.
Market participants expect Germany, Japan, South Korea, Taiwan, and India would be major casualties of Trump’s latest tariff threat.
Trump’s tariffs on automobiles would weigh on the German economy, which has been experiencing an economic contraction for the past two years. ECB policymaker and Bundesbank President Joachin Nagel said on Monday that our “strong export orientation” makes us “particularly vulnerable from potential Trump tariffs”.
Daily digest market movers: EUR/USD ticks higher at US Dollar’s expense
- EUR/USD is slightly up as the US Dollar drops despite investors becoming increasingly confident that the Federal Reserve (Fed) will keep interest rates in the current range of 4.25%-4.50% for longer. According to the CME FedWatch tool, the Fed is expected to keep interest rates steady in the March, May, and June policy meetings.
- On Tuesday, San Francisco Fed Bank President Mary Daly said in a community banking conference hosted by the American Bankers Association that monetary policy needs to remain “restrictive” until she sees that we are really continuing to make “progress on inflation”. Daly added that she wants to be careful before making any policy adjustment, with the labor market and economy remaining solid.
- Regarding the impact of President Trump’s agenda on the economy, Daly said it is difficult to assess the impact of Trump’s policies on economic growth, labor supply, and inflation until she knows details and their "scope, magnitude, and timing."
- For more cues on the interest rate outlook, investors will focus on the Federal Open Market Committee (FOMC) minutes for the January policy meeting, which will be published at 19:00 GMT.
- On the ECB front, traders have fully priced in three more interest rate cuts this year as a few policymakers see risks to inflation undershooting the 2% target. The ECB also reduced its Deposit Facility rate by 25 basis points (bps) to 2.75% but didn’t commit to a pre-defined monetary expansion path.
Technical Analysis: EUR/USD holds 50-day EMA
EUR/USD trades in a tight range around 1.0450 in European trading hours on Wednesday. The 50-day Exponential Moving Average (EMA) continues to support the major currency pair around 1.0430.
The 14-day Relative Strength Index (RSI) struggles to break above 60.00. A bullish momentum would activate if the RSI (14) manages to sustain above that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
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.