EUR/USD rises to four-month highs amid broad US Dollar weakness, Fed in focus

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The Euro (EUR) consolidates gains against the US Dollar (USD) on Monday as the Greenback remains under broad selling pressure amid rising economic and political concerns in the United States. At the time of writing, EUR/USD is trading around 1.1886, holding near its highest level since September 17.

EUR/USD rises to four-month highs as the US Dollar stays under pressure.
Political risk, trade tensions and policy uncertainty weigh on the Greenback.
Attention turns to the Fed decision and key Eurozone data later this week.

The renewed demand for the Euro comes as uncertainty surrounding US President Donald Trump’s aggressive trade rhetoric, repeated use of tariffs as an economic weapon and interference with the Federal Reserve’s (Fed) independence are eroding the United States’ economic credibility.

Against this backdrop, traders are rotating out of the US Dollar in favor of other G10 currencies, reflecting fading confidence in the Greenback’s role as the world’s dominant reserve currency.

Political risks are also back in focus. Fears of another US government shutdown have resurfaced after Senate Democrats vowed to block a major funding bill, with lawmakers facing a January 30 deadline.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading near 96.97, sliding to four-month lows.

The Dollar’s weakness has been compounded by a sharp recovery in the Japanese Yen (JPY) after reports that the New York Fed conducted a “rate check” on USD/JPY on behalf of the US Treasury, fueling speculation about possible coordinated intervention.

Meanwhile, US data released earlier in the day did little to support the US Dollar. Durable Goods Orders jumped 5.3% in November, well above market expectations of 0.5% and reversing October’s -2.1% reading.

Durable Goods Orders excluding defense rose 6.6%, while orders excluding transportation increased 0.5%, beating forecasts of 0.3% and following October’s 0.1% gain. Non-defense capital goods orders excluding aircraft advanced 0.7% after a 0.3% increase in October.

Attention now turns to the Federal Reserve’s interest rate decision on Wednesday. Markets widely expect the central bank to keep interest rates unchanged, placing the spotlight on Chair Jerome Powell’s press conference for fresh guidance on the policy outlook.

In the Eurozone, traders are watching January Business Climate, Consumer Confidence and the Economic Sentiment Indicator data due Thursday, followed by the preliminary estimate of fourth-quarter Gross Domestic Product (GDP) on Friday.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.