EUR/USD trades flat as Dollar steadies, ECB flags Euro strength concerns

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The Euro (EUR) trades little changed against the US Dollar (USD) on Thursday, with EUR/USD struggling to find direction as a firm Greenback caps upside attempts. At the time of writing, the pair trades around 1.1952 after touching its highest level in over four years earlier this week.

EUR/USD trades flat as a firmer US Dollar caps upside momentum.
Dollar stabilises after Fed holds rates, but broader downside risks linger.
ECB officials flag concerns over Euro strength and its impact on inflation.

The Greenback also dipped to its lowest level since 2022, as investors rotate out of the US Dollar amid concerns that US President Donald Trump’s aggressive trade policies and repeated attacks on the Federal Reserve (Fed) are fueling longer-term currency debasement risks.

However, the US Dollar is showing signs of stabilisation, drawing some support as traders reassess the Fed’s monetary policy outlook following Wednesday’s interest rate decision.

The central bank left interest rates unchanged, as widely expected, and struck a cautious, data-dependent tone, stressing that the Committee is well-positioned to adjust monetary policy if needed, should risks arise that threaten progress toward its dual mandate.

Even so, downside risks for the US Dollar remain in play, helping to keep the broader bias in EUR/USD tilted to the upside and leaving the door open for further gains.

That said, the Euro’s sharp recent appreciation is beginning to draw attention from European Central Bank (ECB) officials, reviving concerns that a persistently stronger currency could eventually complicate the policy outlook.

Austrian central bank Governor and ECB Governing Council member Martin Kocher said “If the euro appreciates further and further, at some stage this might create, of course, a certain necessity to react in terms of monetary policy,” Kocher noted, stressing that this would not be about targeting the exchange rate itself, “but because the exchange rate translates into less inflation, and then this is of course a monetary policy issue.”

Following the comments, Overnight Index Swaps (OIS) showed a modest uptick in easing expectations, with markets now pricing in around a 26% chance of a rate cut by the September meeting, up from roughly 16% previously. Even so, the ECB is still widely expected to leave policy unchanged at its next meeting on February 4-5.

Looking ahead, focus shifts to key economic data due on Friday, with Eurozone preliminary Q4 Gross Domestic Product (GDP) and the Unemployment Rate on tap, followed by the US Producer Price Index (PPI).

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.