EUR/USD edges higher as weaker US Dollar offsets solid US data

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The Euro (EUR) edges higher against the US Dollar (USD) on Thursday, supported by a broadly weaker Greenback as traders shrug off solid US economic data. At the time of writing, EUR/USD is trading around 1.1742, reversing the previous day’s losses.

EUR/USD rebounds on broad US Dollar weakness.
US data shows steady inflation and solid growth, but fails to lift the Greenback.
ECB sees inflation in a “good place” and growth more resilient than expected.

Fresh US data pointed to steady inflation and resilient growth. Core Personal Consumption Expenditures (QoQ) for Q3 rose 2.9%, in line with expectations and unchanged from the previous quarter.

Annualized Q3 Gross Domestic Product expanded 4.4%, beating forecasts of 4.3% and up from 3.8% in Q2. Meanwhile, Initial Jobless Claims rose to 200K from last week’s revised 199K, but came in well below expectations of 212K.

Core PCE inflation rose 0.2% MoM in November, in line with expectations and unchanged from October, while the annual rate ticked up to 2.8% from 2.7%. Headline PCE also increased 0.2% on the month, matching forecasts, with the yearly pace rising to 2.8% from 2.7%.

Personal Income climbed 0.3%, below expectations of 0.4% but stronger than October’s 0.1% gain, while Personal Spending held firm at 0.5%.

From a monetary policy perspective, the data reinforced expectations that the Federal Reserve (Fed) can afford to remain patient. Markets are widely anticipating no change in rates at the January 27-28 meeting, while the latest Reuters poll shows that 55 out of 100 economists expect the first rate cut to come in June or later.

Dovish Fed expectations, combined with lingering concerns over political interference in the Fed’s independence, remain a drag on the US Dollar, limiting any meaningful recovery.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.37, down about 0.41%.

Markets also welcomed easing US-European Union (EU) trade tensions after US President Donald Trump backed away from the tariffs scheduled to take effect on February 1, following what he described as a “very productive meeting” with NATO Secretary General Mark Rutte that resulted in a framework deal on Greenland and the Arctic region.

On the Euro side, the latest European Central Bank (ECB) monetary policy accounts showed policymakers are in no rush to adjust interest rates. Officials noted that the inflation outlook “continued to be in a good place,” while Eurozone economic activity was proving “more resilient than previously anticipated.” Members also stressed the importance of maintaining “full optionality in either direction” for future meetings.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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