EUR/USD weakens below 1.1700 as Fed keeps rates unchanged

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EUR/USD softens to around 1.1680 in Thursday’s early Asian session.
Fed decided to keep the interest rates in the 3.50%-3.75% range at the April meeting on Wednesday.
ECB is widely expected to hold the key interest rates steady at its upcoming meeting.

The EUR/USD pair loses ground to near 1.1680 during the early European session on Thursday. The US Dollar (USD) strengthens against the Euro (EUR) after the US Federal Reserve (Fed) left interest rates unchanged. The attention will shift to the European Central Bank (ECB) interest rate decision later on Thursday.

Fed officials decided to hold the benchmark federal funds rate steady in a range of 3.5% to 3.75% at its April policy meeting. Four officials voted against the decision, including three who objected to language in their post-meeting statement that suggested the central bank would eventually resume cutting rates. The 8-4 vote marked the first time since October 1992 that four officials dissented against a committee decision.

Jerome Powell said on Wednesday that he will continue to serve as a Fed governor for an indefinite period even after his chairmanship ends. Kevin Warsh, Trump’s nominated successor, appears on track to take over for Powell at the central bank.

The ECB is widely expected to keep its key interest rates unchanged at its upcoming policy meeting on Thursday due to high uncertainty. Nonetheless, rising inflation, driven by energy price volatility from the Iran war, has raised the expectation of a rate hike in June.

Goldman Sachs analysts see the ECB delivering two 25 basis point (bps) rate hikes in the months ahead. The first being in June, with the next in September, in bringing the deposit rate back to 2.50%.

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.