EUR/USD trades sideways, holds above 1.1700 as focus remains on Fed decision this week

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The EUR/USD pair kicks off the new week on a subdued note and oscillates in a narrow band, around the 1.1725-1.1720 region during the Asian session.

EUR/USD traders seem non-committed on Monday, though the downside seems cushioned.
The divergent ECB-Fed policy expectations might continue to act as a tailwind for the major.
Traders might also opt to wait on the sidelines ahead of the FOMC decision on Wednesday.

The EUR/USD pair kicks off the new week on a subdued note and oscillates in a narrow band, around the 1.1725-1.1720 region during the Asian session. The downside, however, seems limited amid the divergent European Central Bank (ECB)-Federal Reserve (Fed) policy expectations and ahead of this week's key central bank event risk.

As was widely anticipated, the ECB left interest rates unchanged last Thursday and maintained an upbeat view on growth and inflation. Moreover, the central bank added that it would follow a meeting-by-meeting, data-dependent approach and was not pre-committing to a specific path for interest rates. This, in turn, dampened expectations for any further cut in borrowing costs, which continues to underpin the shared currency and offer support to the EUR/USD pair.

In fact, traders have now reduced the odds of another ECB rate cut before spring to just 40%. This gives the euro a policy advantage against the Fed, which is universally expected to cut rates as early as this week. In fact, the CME Group's FedWatch Tool indicates an over 90% chance of a 25-basis-point (bps) rate cut and a small possibility of a jumbo rate cut by the Fed on Wednesday. This keeps the US Dollar (USD) bulls on the defensive and also acts as a tailwind for the EUR/USD pair.

Bulls, however, seem reluctant and opt to wait for the outcome of a two-day FOMC monetary policy meeting on Wednesday before placing fresh bets. Traders will look for cues about the Fed's future rate-cut path, which, in turn, will play a key role in influencing the near-term USD price dynamics and providing some meaningful impetus to the EUR/USD pair. Nevertheless, the fundamental backdrop suggests that any corrective pullback could be seen as a buying opportunity.

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.