EUR/USD strengthens above 1.1950 amid US trade policy uncertainty, Fed independence concerns

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The EUR/USD pair gains ground to near 1.1965 during the early Asian session on Friday. Unpredictable US trade policy and questions over the independence of the Federal Reserve (Fed) weigh on the US Dollar (USD) against the Euro (EUR).

EUR/USD gathers strength around 1.1965 in Friday’s early Asian session.
Concerns over US trade policy uncertainty and the Fed’s independence continue to weigh on the US Dollar.
Trump said he would announce his nominee to chair the Fed next week.

The Greenback faced some selling pressure earlier this week after US President Donald Trump seemed to shrug off the currency's weakness, though it recovered some lost ground after Treasury Secretary Scott Bessent said a day later that Washington has a strong-dollar policy. Concerns over US policy volatility could undermine the Greenback and create a tailwind for the major pair in the near term.

"Concerns that investors have about trade and geopolitical policies that have been wheeled out in the U.S. at the moment have been potentially negative for the dollar," said Shaun Osborne, chief currency strategist at Scotiabank.

Trump said that he would announce his nominee to chair the Fed “next week” and reiterated his expectation that the central bank’s new leader will lower interest rates. This headline raises worries about the independence of the US central bank and might contribute to the USD’s downside.

Traders await the preliminary reading of Gross Domestic Product (GDP) for the fourth quarter (Q4) from the Eurozone and Germany, which will be published on Friday. Also, the flash German Consumer Price Index (CPI) report is due later in the day. However, if the reports show weaker-than-expected outcomes, this could drag the shared currency lower against the USD. On the US docket, the Producer Price Index (PPI) report and Fed’s Alberto Musalem speech will be closely watched.

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.