EUR/USD strengthens above 1.1650 ahead of US PCE inflation data

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The EUR/USD pair recovers some lost ground around 1.1680 during the Asian trading hours on Friday, bolstered by a weaker US Dollar (USD). Markets might turn cautious later in the day ahead of the key US August Personal Consumption Expenditures (PCE) Price Index report.

EUR/USD gains traction near 1.1680 in Friday’s Asian session.
Traders will take more cues from the key US PCE inflation data later on Friday.
Reuters poll indicates the majority of economists surveyed expect ECB to hold interest rates steady until at least December 2025.

Traders continue to assess mixed signals from Federal Reserve (Fed) policymakers. Kansas City Fed President Jeffrey Schmid stated that the US central bank may not need to lower interest rates again soon, citing the need to keep bringing down inflation. Meanwhile, Chicago Fed President Austan Goolsbee noted that he was not eager to do a lot more policy easing while inflation is above target and moving the wrong way.

The attention will shift to the US consumer spending data for signals of how urgently the economy needs an additional rate cut from the Fed. Markets are now pricing in nearly an 87.7% odds of a 25 basis points (bps) rate cut in the October meeting, down from a 90%-92% possibility on Wednesday. Any signs of hotter inflation could dampen the case for Fed rate cuts and underpin the Greenback, which creates a headwind for the major pair.

Across the pond, a significant majority of economists surveyed expected the European Central Bank (ECB) to keep rates unchanged for the remainder of the year, according to a Reuters poll. Rising expectations that the ECB is done cutting rates could support the shared currency against the USD. However, some financial institutions anticipate further cuts later this year or in early 2026 if conditions warrant.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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.