The EUR/USD pair is seeing a continued decline as the European Central Bank (ECB) is expected to deliver a 25 basis point rate cut in October. This marks the central bank’s third reduction this year, with markets reflecting a 95% probability of a rate cut this month. The lower Eurozone inflation reading in September, falling below the ECB’s 2% target, has raised expectations for the rate cut. The risk-sensitive Euro is also facing challenges due to escalating geopolitical tensions in the Middle East, impacting risk appetite in the market.
Recent geopolitical tensions in the Middle East have added pressure on the Euro, with US President Joe Biden mentioning talks with Israel regarding potential strikes on Iran’s oil infrastructure. Israeli Prime Minister Benjamin Netanyahu also warned of consequences for Iran following an attack involving ballistic missiles on Israel. As a result, the Euro may continue to struggle as the situation unfolds. The US Dollar, on the other hand, has received support from better-than-expected US economic data, challenging dovish expectations for Federal Reserve monetary policy.
The Euro is the currency for 19 European Union countries in the Eurozone, making it the second most heavily traded currency in the world behind the US Dollar. The Euro accounted for 31% of all foreign exchange transactions in 2022, with an average daily turnover of over $2.2 trillion. EUR/USD is the most traded currency pair, followed by EUR/JPY, EUR/GBP, and EUR/AUD. The European Central Bank (ECB) in Frankfurt, Germany is responsible for setting interest rates and managing monetary policy for the Eurozone. The ECB’s primary mandate is to maintain price stability by controlling inflation or stimulating economic growth.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), plays a crucial role in determining the Euro’s performance. If inflation exceeds the ECB’s 2% target, it may lead to a need for interest rate hikes to control inflation. Economic indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys also influence the direction of the Euro. Positive economic data and a strong economy are beneficial for the Euro as they attract foreign investment and may lead to interest rate increases, strengthening the Euro further.
Trade Balance is another important economic indicator for the Euro, measuring the difference between a country’s exports and imports. A positive trade balance strengthens a currency as it indicates higher demand for exports, while a negative trade balance could weaken a currency. Economic data releases for the largest euro area economies, including Germany, France, Italy, and Spain, are significant as they account for a majority of the Eurozone economy. Overall, economic data and geopolitical developments will continue to impact the Euro’s performance in the forex market.
