EUR/USD remains above 1.1700 amid ECB’s cautious outlook

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EUR/USD holds ground after two days of losses, trading around 1.1720 during the Asian hours on Friday. Traders await HCOB Purchasing Managers’ Index (PMI) data from the Eurozone and Germany due later in the day. Eurozone Producer Price Index (PPI) will also be eyed.

EUR/USD edges higher ahead of HCOB PMI data from the Eurozone and Germany.
The US Dollar gains ground despite the ongoing US government shutdown.
Senate Democrats are set to block a GOP-backed short-term funding bill again on Friday.

European Central Bank (ECB) policymaker Martins Kazaks said on Thursday that “the current interest rate level is very appropriate” and interest rates can remain unchanged. Kazaks added that uncertainty remains very high and must retain full freedom of action.

The EUR/USD pair maintains its position the US Dollar (USD) advances as traders largely dismiss the concerns over the ongoing US government shutdown. The partial US government shutdown will likely delay the release of key US macro including the US September Nonfarm Payrolls (NFP) report. The US ISM Services PMI and the final S&P Global Services PMI reports are due later on Friday.

The shutdown is expected to extend until next week. Senate Democrats are poised to vote against a GOP-backed short-term funding bill again tomorrow, and the Senate is unlikely to meet this weekend.

The weakness in the US labor market boosts bets on further Federal Reserve (Fed) rate cuts. The CME FedWatch Tool suggests that markets are now pricing in a 97% chance of a Fed rate cut in October and a 91% possibility of another reduction in December.

ECB FAQs

What is the ECB and how does it influence 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 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.

What is Quantitative Easing (QE) and how does it affect the Euro?

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.

What is Quantitative tightening (QT) and how does it affect the Euro?

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.

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