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- EUR/USD rises to near 1.0750 due to heightened expectations of the Fed’s rate cuts
EUR/USD rises to near 1.0750 due to heightened expectations of the Fed’s rate cuts
- EUR/USD continues its winning streak as recent inflation data raises the odds of the Fed’s rate cuts in 2024.
- US Core PCE inflation rose by 2.6% YoY in May, down from 2.8% in April.
- The Euro received support as Marine Le Pen’s National Rally (RN) confirmed its status as the country’s leading political force.
EUR/USD extends its gains for the third successive day, trading around 1.0750 during the Asian hours on Monday. Speculation that the US Federal Reserve (Fed) might cut interest rates in 2024 is weighing on the US Dollar (USD), supporting the EUR/USD pair.
On Friday, the US Bureau of Economic Analysis reported that US inflation eased to its lowest annual rate in over three years. The US Personal Consumption Expenditures (PCE) Price Index increased by 2.6% year-over-year in May, down from 2.7% in April, meeting market expectations. Core PCE inflation also rose by 2.6% year-over-year in May, down from 2.8% in April, aligning with estimates.
On Friday, the Federal Reserve Bank of San Francisco President Mary Daly said that monetary policy is working. Still, it’s too early to tell when it will be appropriate to cut the interest rate. Daly stated, "If inflation stays sticky or comes down slowly, rates would need to be higher for longer,” per Reuters.
On the Euro's front, European Central Bank (ECB) Governing Council member Olli Rehn indicated last week that the central bank could lower interest rates two more times this year. Recent data showed that France's annual inflation rate slowed to 2.5%, in line with expectations, while Spain's rate decreased to 3.5%, slightly above expectations. In contrast, Italy's inflation accelerated to 0.9%, as anticipated. Additionally, Germany’s Consumer Price Index (CPI) data is scheduled to be released on Monday.
In France, Marine Le Pen’s National Rally (RN) confirmed its status as the country’s leading political force in the first round of legislative elections, which saw the highest turnout in three decades. Le Pen’s party secured a clear victory, though not a decisive one, leaving the outcome uncertain ahead of the second round of voting on July 7, according to France 24.
Euro FAQs
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%).
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.
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.
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.
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.
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