EUR/USD corrects ahead of ECB interest rate decision
- EUR/USD falls to near 1.1350 ahead of the ECB monetary policy meeting.
- The ECB is expected to cut interest rates by 25 bps for the sixth time in a row.
- Big progress in US-Japan trade talks has provided some relief to the US Dollar.
EUR/USD declines to near 1.1350 during European trading hours on Thursday. The major currency pair edges lower ahead of the European Central Bank’s (ECB) interest rate decision, which will be announced at 12:15 GMT. The ECB is widely anticipated to cut its key borrowing rates by 25 basis points (bps), pushing the Deposit Facility Rate and the Main Refinancing Operations Rate lower to 2.25% and 2.4%, respectively.
Traders are increasingly confident that the ECB will reduce interest rates for the seventh time since the central bank started its easing cycle in June and sixth time in a row amid high conviction that the Eurozone inflation is on track to return to the bank’s target of 2% by the year-end. Additionally, fears of economic shocks in an already slowing economy pave the way for further monetary policy easing.
As the ECB is almost certain to reduce interest rates, investors will pay close attention to ECB President Christine Lagarde’s press conference for fresh cues on the monetary policy and the economic outlook. Financial market participants would be keen to know whether Lagarde will commit to her stance that interest rates are still restrictive. If Lagarde reiterates the same, it would increase the probability of further policy easing this year.
In addition to that, investors would like to know how much the tariff policy of United States (US) President Donald Trump will impact the Eurozone economic growth and what kind of measures the ECB would take to contain it.
The old continent is expected to be one of the major victims of Trump’s international policies, even as the European Union’s (EU) trade commission manages to negotiate a fair deal with Washington. China is expected to diversify its products to other nations if the trade war between the US and Beijing continues. China could sell many products to the Euro area and other economies, as no other nation can beat its low-cost competitive advantage.
Daily digest market movers: EUR/USD drops as US Dollar rebounds
- EUR/USD corrects from the round-level figure of 1.1400 as the US Dollar (USD) strives to gain ground near its recent lows. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to near 99.60. The Greenback attracts bids on positive development in trade negotiations between the US and Japan.
- On Wednesday, US President Trump indicated through a post on TruthSocial that negotiations between Japan's economic revitalization minister Ryosei Akazawa and US departments have made big progress. “A Great Honour to have just met with the Japanese Delegation on Trade. Big Progress!” Trump wrote.
- Investors see this as a constructive step by Donald Trump that will diminish fears of global economic turmoil. His preference for negotiating bilateral trades with his trading partners rather than imposing hefty tariffs will ease uncertainty across the globe.
- However, the escalated trade war between the US and China will keep investors on their toes. The fight between the world’s two largest powerhouses has shifted to “who will initiate trade talks” from “size of tariffs”. On Tuesday, White House press secretary Karoline Leavitt said that the President is open to a trade deal with Beijing, but China should make the first move. "The ball is in China’s court: China needs to make a deal with us, we don’t have to make a deal with them,” Leavitt said, Reuters reported.
- Meanwhile, fears of rising inflation and slower economic growth domestically will keep the US Dollar on the backfoot. On Wednesday, Federal Reserve (Fed) Chair Jerome Powell warned that growth has likely “slowed in the first quarter of 2025” from last year's solid pace in the face of Trump’s economic policies. However, Powell remained confident that the economy is 'solid' despite heightened uncertainty and downside risks, and reiterated a “wait and see” approach until the Fed gets greater clarity.
Technical Analysis: EUR/USD faces pressure near 1.1400
EUR/USD falls after failing to extend recovery above 1.1400 in Thursday’s European session. However, the overall outlook of the major currency pair is strongly bullish as all short-to-long Exponential Moving Averages (EMAs) slope higher.
The 14-day Relative Strength Index (RSI) holds above 70.00, indicating a strong bullish momentum.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the April 11 low of 1.1190 will be the key support 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.
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