EUR/USD softens below 1.1800 on Fed hawkish remarks

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The EUR/USD pair edges lower to around 1.1775 during the early Asian session on Wednesday, pressured by a renewed US Dollar (USD) demand. Traders await the US President Donald Trump's State of the Union address later on Wednesday for clarity on fiscal policies.

EUR/USD weakens to near 1.1775 in Wednesday’s early Asian session.
Fed policymakers signaled no near-term appetite to change the setting of interest rate policy.
EU freezes US trade deal over tariff uncertainty.

Hawkish remarks from the Federal Reserve (Fed) officials provide some support to the Greenback and act as a headwind for the major pair. Boston Fed President Susan Collins said on Tuesday that it will be appropriate to hold in the current range for some time. Meanwhile, Richmond Fed President Thomas Barkin noted that monetary policy is “well-positioned” to address the risks surrounding the economic outlook.

US trade policy remains uncertain following the US Supreme Court ruling that struck down US President Donald Trump's "Liberation Day" tariffs. In response, Trump invoked Section 122 of the Trade Act of 1974 to impose a new 10% global tariff, which he quickly threatened to raise to 15%. This, in turn, could weigh on the USD against the Euro (EUR).

The European Parliament decided on Monday to postpone a vote on the European Union's trade deal with the US due to the new import tariffs.

The European Central Bank (ECB) President Christine Lagarde said on Monday that the central bank must remain “agile” in setting monetary policy, despite currently being well-positioned. Lagarde reiterated that policymakers will set interest rates “meeting by meeting, and emphasized the balance of risks as “broadly balanced.”

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.