EUR/USD posts modest gains near 1.1650 amid Fed rate cut bets

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EUR/USD trades with mild gains near 1.1645 in Monday’s early Asian session.
Markets widely expect the Fed to cut interest rates at its December meeting on Wednesday.
The growing expectation that the ECB is done cutting interest rates provides some support to the Euro.

The EUR/USD pair posts modest gains around 1.1645 during the early Asian session on Monday. The prospect of a US Federal Reserve (Fed) rate cut at its December meeting on Wednesday could weigh on the US Dollar (USD) against the Euro (EUR). Later on Monday, the German Industrial Production and Eurozone Sentix Investor Confidence reports will be published.

Markets are currently pricing in a nearly 87% probability of a 25 basis points (bps) rate reduction, which would bring the federal funds rate down to a target range of 3.50%-3.75%. Traders will closely monitor the press conference and a Summary of Economic Projections, or ‘dot-plot,’ for fresh impetus. If the US central bank delivers a "hawkish cut," this could support the Greenback and act as a headwind for the major pair.

"We expect to see some dissents, potentially from both hawkish and dovish members," said BNY's head of markets macro strategy Bob Savage in a note to clients.

Across the pond, the Eurozone inflation came in slightly higher than expected in November, reducing the immediate pressure for a rate cut from the European Central Bank (ECB). Economists expect the ECB to keep rates on hold at the upcoming meeting on December 18. Growing expectation that the ECB is done cutting interest rates could underpin the EUR against the Greenback in the near term.

Goldman Sachs analysts anticipate the deposit rate will stay at 2.0% throughout 2026 unless inflation significantly decreases. Meanwhile, Deutsche Bank economists see a probability of a 25 basis point (bps) rate hike by the end of 2026, citing inflationary pressure.

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.