Euro returns below 1.1600 as US Dollar selling pressure eases
- EUR/USD gives back part of its early gains as the US Dollar recovers from recent lows.
- Soft US economic data has pushed traders to scale back expectations of a Fed rate hike next month.
- The ECB is widely expected to raise interest rates again next month.
EUR/USD trims earlier gains on Monday as the US Dollar (USD) shows signs of stabilization after opening the week under selling pressure. At the time of writing, the pair trades around 1.1580 after touching an intraday high of 1.1614, its highest level since June 17.
The Greenback is caught between fading expectations of an imminent Federal Reserve (Fed) rate hike and tensions in the Middle East, which keep some defensive demand alive and limit the downside.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 99.57 after touching 99.30, its weakest level since June 5.
Traders no longer expect the Fed to raise interest rates at its September meeting. According to the CME FedWatch tool, markets now assign around a 70% probability that the central bank will keep rates unchanged next month.
The shift follows recent US economic data pointing to weaker labour demand, softer consumer spending and easing inflationary pressure. In contrast, the European Central Bank (ECB) is widely expected to raise interest rates for the second time this year in September as policymakers seek to bring inflation back toward the 2% target.
On the geopolitical front, the 60-day memorandum of understanding signed by the United States and Iran in June expired on Monday without a permanent agreement, while shipping through the Strait remains heavily restricted.
Against this backdrop, energy-driven inflation risks remain alive. This supports expectations of an ECB rate hike in September while preventing markets from fully ruling out a Fed hike later this year.
Looking ahead, the final Eurozone Harmonized Index of Consumer Prices (HICP) data for July are due on Wednesday. Core HICP inflation is expected to be confirmed at 2.5% YoY.
In the US, traders will examine the Minutes of the July Federal Open Market Committee (FOMC) meeting, also due on Wednesday, for fresh clues about the Fed’s policy path.
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.
