EUR/USD holds steady above 1.1650 amid Fed independence concerns

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The EUR/USD pair holds steady near 1.1665 during the early Asian trading hours on Tuesday. Traders digested the US President Donald Trump administration's threat to indict the Federal Reserve (Fed) after Chair Jerome Powell said on Sunday that he’s under criminal investigation.

EUR/USD flat lines around 1.1665 in Tuesday’s early Asian session.
Renewed concerns over the Fed’s independence could drag the US Dollar lower.
ECB policymakers suggested the cycle is "most likely" finished.

Political risks around the US central bank could weigh on the US Dollar (USD) and create a tailwind for the pair. Reuters reported on Sunday that the US Justice Department is investigating Fed’s Powell for possible criminal issues related to his June Senate testimony on the Fed’s building renovations. Powell called the threats a "pretext" aimed at putting pressure on the Fed to cut interest rates.

"This open warfare between the Fed and the U.S. administration ... it's clearly not a good look for the U.S. dollar," said Ray Attrill, National Australia Bank's head of currency strategy.

Signs that the European Central Bank (ECB) appears to be near the end of its rate-cutting cycle could provide some support to the shared currency. ECB Vice President Luis de Guindos said last week that interest rates are at an appropriate level, though he warned of “enormous uncertainty” due to geopolitical risks.

Financial markets currently see limited scope for immediate action, with a chance of rates remaining unchanged at the next meeting. Some analysts expect a rate reduction later in 2026, though a hike is considered unlikely given the subdued inflation backdrop.

The US Consumer Price Index (CPI) inflation data for December will be in the spotlight later on Tuesday. The headline and core CPI are projected to see a rise of 2.7% YoY in December. If the report shows a hotter-than-expected outcome, this could help limit the Greenback’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.

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