Euro nudges up above 1.1640 amid broad-based US Dollar weakness
- EUR/USD ticks up to 12-day highs above 1.1600 despite high Oil prices, risk-off markets.
- Rabobank analysts see US Dollar debasement trade still weighing on the Greenback.
- Investors are bracing for a quarter-point rate hike by the ECB on Thursday.
The Euro (EUR) attempts to resume its uptrend against the US Dollar (USD) on Wednesday’s early European session despite the risk-off mood and the high Crude prices. EUR/USD is drawing support from USD weakness to hit 12-day highs just above 1.1640, as investors brace for Thursday’s European Central Bank (ECB) monetary policy meeting.
Euro rallies are likely to remain shallow, with Oil prices at their highest levels in the last three months as the situation in the Gulf deteriorates by the day. Tehran launched an attack on a US Navy warship and an airbase in Jordan on Tuesday, and the US military responded by targeting several Iranian tankers. Beyond that, Iran-backed Houthi militias attacked Oil facilities in Saudi Arabia, which risks leading the conflict into an all-out regional war.
Dollar debasement debate weighs on sentiment
The US Dollar, on the other hand, remains on its back foot despite the strong US Nonfarm Payrolls data released last week, with investors awaiting Friday's Consumer Price Index (CPI) report to consolidate hopes of a Federal Reserve (Fed) rate hike at next week's meeting.
Analysts at Rabobank highlight that the “USD’s dithery tone in recent session adds weight to the view that there has been a change in sentiment in the FX market.” They argue that the “Dollar debasement debate which was triggered by US Treasury Secretary Bessent’s bond intervention announcement on August 19 appears to have undermined confidence in the greenback,” helping to explain why the currency has struggled to capitalise on otherwise supportive rate expectations.
The calendar is thin on Wednesday, with ECB President Christine Lagarde's speech at the Deutsche Bundesbank in Berlin, the only event worth mentioning. Lagarde, however, will not speak about monetary policy as the central bank kicks off its two-day meeting, which is widely expected to end with a quarter-point hike to 2.5% in the central bank's benchmark interest rate.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.