EUR/USD slumps below 1.1800 on hawkish Fed Minutes, eyes on ECB succession

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The EUR/USD pair tumbles to a near two-week low around 1.1785 during the early Asian session on Thursday. The US Dollar (USD) strengthens against the Euro (EUR) on hawkish FOMC minutes that revived speculation about potential interest rate hikes if inflation remains elevated.

EUR/USD falls to near 1.1785 in Thursday’s early Asian session.
Several Fed officials said further tightening may be required if inflation stays sticky.
ECB’s Lagarde may leave her job before the end of her term.

According to the FOMC Minutes from its January policy meeting, almost all participants favored holding rates steady, with only a couple preferring a rate cut. However, policymakers did not close the door on further reduction if inflation declined in line with their expectations. At the same time, Fed officials said they would have supported describing future decisions in more two-sided terms. Several members suggested that interest rate hikes could be necessary if price pressures persist.

Across the pond, European Central Bank (ECB) President Christine Lagarde may step down from her position earlier than her planned retirement in October 2027, per the Financial Times. The source said Lagarde wants to enable French President Emmanuel Macron and German Chancellor Friedrich Merz to find her replacement, without indicating when she may exit.

Traders will closely monitor the preliminary Purchasing Managers' Index (PMI) readings from Germany and the Eurozone, which are scheduled for publication on Friday. In case of stronger-than-expected outcomes, this might help limit the shared currency’s losses in the near term.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.