- EUR/USD strengthens to near 1.1775 in Monday’s early Asian session.
- Growing expectations for the Fed to implement rate cuts in early 2026 weigh on the US Dollar.
- Money markets assign only a limited chance to an ECB rate cut in early 2026.
The EUR/USD pair trades in positive territory around 1.1775 during the early Asian session on Monday. The prospect of a US Federal Reserve (Fed) rate cut in 2026 weighs on the US Dollar (USD) against the Euro (EUR). Markets brace for US President Donald Trump to nominate a Fed chair to replace Jerome Powell, whose term ends in May. Later on Monday, the US Pending Home Sales report for November will be released.
The US central bank cut the federal funds rate by 25 basis points (bps) at its December policy meeting, bringing the target range to 3.50%-3.75%. The Fed delivered a cumulative 75 bps of rate cuts in 2025 amidst a cooling labor market and slightly elevated inflation. Markets are also pricing in two additional rate reductions next year, which could drag the Greenback and create a tailwind for the major pair.
The possibility that a new Fed Chair to replace Jerome Powell could look to cut rates next year might contribute to the USD’s downside. Trump said that he expects the next Fed chairman to keep interest rates low and never “disagree” with him.
Across the pond, the European Central Bank (ECB) held interest rates steady earlier this month and signaled they would likely remain so for some time. ECB President Christine Lagarde noted that the central bank cannot provide forward guidance on future rate moves due to high uncertainty, emphasizing a data-dependent, meeting-by-meeting approach.
The money markets have priced in for a 25 bps interest rate cut by the ECB in February 2026, currently remaining below 10%. Signals that the ECB rate cut cycle is ending could underpin the shared currency in the near term.
Euro FAQs
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%).
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.
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.
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.
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.
