EUR/USD weakens below 1.1750 on US Dollar rebound, Fed rate-cut expectations could cap losses

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The EUR/USD pair retreats from a 10-week high to near 1.1735 during the early European session on Friday, pressured by a modest rebound in the US Dollar (USD). The potential downside for the major pair might be limited amid the prospect of the US Federal Reserve (Fed) rate cuts next year.

EUR/USD softens to around 1.1735 in Friday’s early European session.
The major pair loses ground on firmer USD, but expectations of Fed rate cuts next year might cap its downside.
ECB’s Lagarde said policy is in a good place and that the bank could update its projections in December.

The US central bank cut interest rates by 25 basis points (bps) at the conclusion of its two-day meeting on Wednesday, marking the central bank's third reduction of the year. Fed officials were split on the decision to lower rates to a range of 3.50%-3.75%, with policymakers dissenting on both sides. Comments from Fed Chair Jerome Powell were seen by traders as less hawkish than expected and exerted some selling pressure on the Greenback against the Euro (EUR).

Furthermore, renewed concerns about the Fed's independence under US President Donald Trump’s administration might contribute to the USD’s downside. Wall Street still views White House economic adviser Kevin Hassett as the most likely candidate to become the next Fed Chair. Analysts believe that Hassett is expected to push for more rate cuts.

Rising bets that the European Central Bank (ECB) is done cutting interest rates could support the shared currency in the near term. ECB President Christine Lagarde reiterated that the current monetary policy stance is in a good position. Meanwhile, ECB policymakers Francois Villeroy de Galhau and Gediminas Simkus stated that there is no immediate reason to either cut or raise rates, as the current policy stance is considered to be in a "good place”.

Traders will take more cues from the Fedspeak later in the day. Cleveland Fed President Beth Hammack and Chicago Fed President Austan Goolsbee are scheduled to speak. Any hawkish remarks from Fed officials could help limit the USD’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.