EUR/USD trades around 1.1700 after pulling back from four-week highs

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EUR/USD depreciates after registering around 1% gains in the previous session, trading around 1.1700 during the Asian hours on Monday.

EUR/USD is pulling back after hitting a four-week high of 1.1742 on Friday.
Fed Chair Powell stated that risks to the labor market are increasing, while also noting that inflation remains a concern.
ECB’s Nagel said that central bank would require a significant change in the economic outlook before considering further rate cuts.

EUR/USD depreciates after registering around 1% gains in the previous session, trading around 1.1700 during the Asian hours on Monday. However, the downside of the pair could be limited as the US Dollar (USD) may continue to lose ground amid rising likelihood of a Federal Reserve (Fed) interest rate cut in September, driven by the comments from Fed Chair Jerome Powell at the Jackson Hole symposium on Friday.

The Fed Chair Powell stated that risks to the job market were rising, but also noted inflation remained a threat and that a decision wasn't set in stone. Powell further stated that the Federal Reserve still believes it may not need to tighten policy solely based on uncertain estimates that employment may be beyond its maximum sustainable level.

According to the CME FedWatch tool, traders are now pricing in nearly an 85% odds of a 25 basis points (bps) rate cut in September, up from 75% before the speech. Focus will also shift to the upcoming release of the Q2 US Gross Domestic Product Annualized and July Personal Consumption Expenditures - Price Index data, the Fed's preferred inflation gauge.

The European Central Bank (ECB) Governing Council member Joachim Nagel said in Jackson Hole that the central bank would need a significant shift in the economic outlook to lower borrowing costs again. Moreover, ECB Governing Council member Martins Kazaks said that the central bank has entered a new monetary-policy phase where officials can focus on monitoring the economy rather than actively intervening to change its course, Bloomberg reported on Sunday.

(This story was corrected on August 25 at 02:55 GMT to say, in the third paragraph, that focus will also shift to the upcoming release of data, not Friday's release.)

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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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