- EUR/USD is gaining momentum around the 1.1125 area in Wednesday's Asian session.
- The Federal Reserve is widely expected to cut its benchmark overnight interest rate on Wednesday.
- Investors are awaiting euro zone HICP data, which is expected to show a 2.2% year-on-year increase in August.
During Asian trading hours on Wednesday, the EUR/USD pair is trading in an uptrend around 1.1125. Rising expectations of wider interest rate cuts by the US Federal Reserve (Fed) are providing some support to the major pair. Main focus on Wednesday will be the Eurozone Consumer Price Index (HICP) data and the Fed’s monetary policy meeting.
Markets remain divided on whether the Fed should cut rates by 25 or 50 basis points. Federal fund futures markets are pricing in a nearly 60% chance of a 50-basis point cut by the Fed at its September meeting on Wednesday, up from 45% last Friday, according to LSEG.
“If yields rise above 50%, the Fed may have information investors don't have and the risk of a recession could be higher than currently expected and priced in,” said Boris Kovacevic, global macro strategist at Combera in Vienna.
US retail sales unexpectedly grew 0.1% m/m in August, improving from a 1.1% increase in the previous month and beating expectations of a -0.2% increase, according to data released by the US Census Bureau on Tuesday. Meanwhile, industrial production grew 0.8% m/m in August, improving from a 0.6% decrease in July and beating market expectations of a 0.2% increase.
Less dovish interest rate guidance from European Central Bank (ECB) officials has supported the euro (EUR) against the U.S. dollar, as ECB policymakers stressed that the central bank will continue to rely on data when making future monetary policy decisions.
Investors will be keeping a close eye on euro zone HICP inflation data due to be released later on Wednesday. The headline HICP is expected to have risen 2.2% year-on-year in August, while the core HICP is expected to show a rise of 2.8% over the same period.
Frequently asked questions about the Euro
The Euro is the currency of 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world after the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion. EUR/USD is the most traded currency pair in the world, accounting for approximately 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB's main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB's main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB's target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries usually benefit the euro, as they make the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone's four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone's economy.
Another important piece of data about the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only increase in value due to the additional demand generated by foreign buyers looking to purchase these goods. So, if the trade balance is positive, the currency will strengthen, and vice versa if it is negative.
