The Euro to US Dollar (EUR/USD) exchange rate reached an eight-month high of 1.1087 before pulling back slightly to trade around 1.1080 during the Asian session on Tuesday. The downside movement is mainly due to the US Dollar (USD) gaining strength amid risk aversion sentiment in the market. However, the USD may face challenges as the market increasingly prices in a potential 25 basis point rate cut by the US Federal Reserve (Fed) in September.
According to the CME’s FedWatch Tool, there is a 76.5% probability of a 25 basis point rate cut by the Fed in September, compared to a 23.5% chance of a 50 basis point cut. Minneapolis Fed President Neel Kashkari has also indicated that discussions about interest rate cuts in September are appropriate given concerns about a weakening labor market. All eyes are now on the upcoming Jackson Hole Economic Symposium, where Federal Reserve Chairman Jerome Powell is scheduled to speak on Friday.
In the Eurozone, investors are closely watching key data releases such as the Harmonized Index of Consumer Prices (HICP) and Producer Price Index figures from Germany. These data points are expected to provide insights into the European Central Bank’s (ECB) policy trajectory. The ECB is anticipated to gradually reduce interest rates, although policymakers are hesitant to commit to a specific rate-cut path due to concerns about potential reacceleration of price pressures.
Shaun Osborne, Chief FX Strategist at Scotiabank, noted that the recent uptick in EUR/USD to above 1.1050 can be attributed to broader USD weakness with minimal other influences. With no major data reports from the Eurozone on Tuesday, the focus remains on external factors such as the USD movement and upcoming key events like the Jackson Hole symposium.
The Euro is the currency used in 20 European Union countries within the Eurozone and is the second most heavily traded currency globally after the US Dollar. The European Central Bank (ECB) in Frankfurt, Germany, is responsible for setting interest rates and managing monetary policy to maintain price stability. Factors such as inflation data, economic indicators, and trade balances play a significant role in determining the strength of the Euro against other currencies.
Inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is crucial for the Euro, as it can prompt the ECB to raise interest rates if inflation exceeds the 2% target. Economic indicators such as GDP, PMIs, employment, and consumer sentiment surveys also impact the direction of the Euro. A strong economy attracts foreign investment and may lead to interest rate hikes, strengthening the Euro, while weak economic data can lead to a decrease in the currency’s value.
The Trade Balance, which measures the difference between exports and imports, is another essential indicator for the Euro. A positive trade balance, indicating higher demand for a country’s exports, strengthens the currency, while a negative balance can weaken it. Economic data from major Eurozone economies like Germany, France, Italy, and Spain are closely monitored as they significantly influence the overall performance of the Euro.
