Euro edges lower below 1.1700 despite fading Fed hike odds
- EUR/USD trades with mild losses near 1.1675 in Thursday’s early Asian session.
- Officials saw a need for a rate hike if inflation doesn’t cool, Fed Minutes showed.
- Markets expect the ECB to increase the key interest rates in September.
The EUR/USD pair posts modest losses around 1.1675 during the early Asian session on Thursday. The Euro (EUR) edges lower against the US Dollar (USD) after experiencing a sharp surge in the previous session. However, the potential downside might be limited as the latest Federal Reserve (Fed) meeting minutes and soft US economic data continue to weigh on the Greenback.
According to Minutes released on Wednesday, Fed officials indicated at their last meeting that they would need to raise interest rates soon unless there was more progress on bringing down inflation.
The US central bank kept the benchmark interest rate steady at 3.5%-3.75% at its July policy meeting, with dissenters focusing on the need for action soon to return inflation to target. Since the last policy meeting, data releases mostly have shown modest price increases on a monthly basis, though the major indicators all have inflation well above the Fed’s 2% target.
Signs of cooling US inflation have dampened market expectations for a Fed rate hike, which could drag the USD lower and act as a tailwind for the major pair. Markets are now pricing a 32.7% chance of a Fed rate hike at the upcoming policy meeting, down from 47% a month earlier, according to the CME FedWatch Tool.
On the other hand, financial markets are now pricing in a continuation of the European Central Bank (ECB) hiking cycle. The ECB Watch Tool indicates a 90% to 94% probability of a 25 basis points (bps) hike to 2.50% at the next policy meeting scheduled for September 9.
Eurozone growth outlook underpins shifting rate dynamics
Analysts at Societe Generale highlight that the macro backdrop in the Eurozone is increasingly reinforcing recent moves in interest rate differentials. They note that "improved growth expectations are now supporting the shift in relative rates that started as a reaction to higher inflation," suggesting that the rate re-pricing initially driven by inflation is now being validated by a firmer growth outlook.
Technical Analysis: EUR/USD maintains a bullish tone amid overbought RSI momentum
In the daily chart, EUR/USD retains a bullish near-term bias as spot holds above the 100-day simple moving average (SMA) and the Bollinger middle band. Price is now pressing the upper Bollinger band while the Relative Strength Index (14) sits deep in overbought territory above 70, which suggests upside momentum remains strong but increasingly stretched.
On the topside, immediate resistance aligns with the upper Bollinger band at 1.1685, where a clear daily close above would open the way for an extension of the current advance. On the downside, initial support is found at the recent pivot area around 1.1675, followed by firmer demand at the 100-day SMA near 1.1570 and the Bollinger middle band at 1.1525, with the lower band down at 1.1365 acting as a more distant structural floor if a deeper mean-reversion phase unfolds.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 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.