EUR/USD strengthens to above 1.1650 on ECB’s cautious stance

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The EUR/USD pair climbs to near 1.1675 during the early European session on Monday. The Euro (EUR) strengthens against the US Dollar (USD) due to a potential meeting between US President Donald Trump and Russian President Vladimir Putin on Friday to end sanctions.

EUR/USD gathers strength to around 1.1675 in Monday’s early European session.
A potential US-Russia meeting and the ECB’s cautious stance underpin the Euro.
Traders ramp up Fed rate cut bets after the weak US July job data.

Trump and Putin have agreed to hold a meeting in Alaska on Friday to discuss ways forward to end the war in Ukraine. Concerns grew after Trump set an August 8 deadline for Putin to agree to an immediate ceasefire or face more severe US sanctions. As the deadline hit, Trump instead announced he and Putin would meet in person on Friday. Optimism surrounding a possible meeting between the US and Russia might provide some support to the shared currency in the near term.

Furthermore, economists pushed back expectations for another reduction in borrowing costs from the European Central Bank (ECB) by three months, according to the Bloomberg survey. This, in turn, contributes to the EUR’s upside. Traders pared bets for a September cut and are only seeing odds of just over 50% for a quarter-point move at the end of the year.

Across the pond, dovish expectations of the US Federal Reserve (Fed) could drag the Greenback lower and create a tailwind for the major pair. Traders raise their bets on Fed rate reductions this year after last week’s jobs report for July showed employers added fewer jobs than expected during the month.

According to the CME FedWatch tool, markets are now pricing in nearly an 89% possibility of a Fed rate cut in September, with at least two rate cuts priced in by the end of the year.

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.