EUR/USD flat lines near 1.1400 ahead of ECB rate decision
- EUR/USD holds steady near 1.1400 in Thursday’s early Asian session.
- Fed’s Powell warned that Trump’s tariffs could lead to a challenging scenario for the US central bank.
- The ECB is widely expected to cut interest rates for the third time this year on Thursday.
The EUR/USD pair trades on a flat note near 1.1400 during the early Asian session on Thursday. The markets remain cautious as traders wait to see if US President Donald Trump’s administration reaches new trading agreements with partners. The European Central Bank (ECB) interest rate decision will take center stage later on Thursday.
Federal Reserve (Fed) Chair Jerome Powell said on Wednesday that trade tensions risk undermining the Fed’s employment and inflation goals. Powell added that US economic growth appears to be slowing, with consumer spending growing modestly, a rush of imports to avoid tariffs likely to weigh on estimates of Gross Domestic Product (GDP), and sentiment souring. The concerns over the economic slowdown in the US might drag the US Dollar (USD) lower and create a tailwind for the major pair.
Across the pond, the ECB is widely expected to cut its key interest rate by 25 basis points (bps) on Thursday, marking a sixth consecutive reduction amid global tariff tensions and economic uncertainty. “We expect the ECB to cut policy rates by 25bp, fully priced, with dovish communication on the outlook, cracking the door open to rates below neutral,” said Bank of America economist Ruben Segura Cayuela.
Traders will take more cues from the ECB Press Conference. Any dovish remarks from policymakers could weigh on the shared currency in the near term. However, analysts believe ECB President Christine Lagarde is unlikely to offer any hints about future rate reductions amid the uncertainty, and the ECB might decide its next steps as data come in.
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.
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