EUR/USD hits 1.13 after Fed Powell signals ready to cut rates

VaselineAugust 23, 2024

0 4 minutes read

EUR/USD hits 1.13 after Fed Powell signals ready to cut rates

EUR/USD hit 1.1300 on Friday for the first time in over a year.
Fed policymakers open door to rate cuts during Jackson Hole.
Coming up next week: key EU and US inflation prints.

EUR/USD bounced back for its second best day since August, up seven-tenths of a percent as the US dollar tumbles across the board. Market risk appetite is pegged to the ceiling after Federal Reserve (Fed) officials tipped their hand to investors, signaling the US central bank is finally ready to start cutting interest rates.

Next week’s forecast: Recession concerns overtake Fed easing

According to CME’s FedWatch tool, rate markets are pricing in a roughly three-to-one chance of a double cut on Sept. 18, with the rest of the board still committed to a quarter-point cut. Bets on a 50 bps opening rate cut in September rose after Fed Chairman Jerome Powell, while speaking at the Jackson Hole Economic Symposium on Friday, openly acknowledged that the time had finally come for the central bank to US to start cutting benchmark rates.

Next: EU and US inflation figures loom late next week

Next week will open with a notably muted data record, however key inflation data points for both the EU and the US loom in the dark. US Gross Domestic Product (GDP) growth numbers will serve as a precursor event on Thursday, but fiber traders will generally focus on a doubleheader of inflation scheduled for next Friday.

Preliminary EU Harmonized Index of Consumer Prices (HICP) inflation figures for August will begin next Friday, and the figures are forecast to show that key EU inflation measures continue to cool towards the Bank’s annualized target of 2% European Central Bank (ECB). On the US side, personal consumption expenditure (PCE) price index inflation is expected to hold steady above the Fed’s desired 2% target, with core PCE inflation for the year to July expected to come in closer to 2.6% from the previous period. .

EUR/USD Price Forecast

Despite some bumps along the way, Fiber managed to hit a new 13-month high on Friday, testing chart territory north of 1.1300. Despite a strongly bullish presence in order flow, intraday price action struggled to hold the key price level, but ended the trading week with a solid gain of 1.51%, one of the pair’s best performances in a week of November last year.

EUR/USD bids continue to rise after the pair managed to rally from the last swing to the 200-day exponential moving average (EMA), climbing to 1.0850. Without a convincing break of 1.1300 on the table, bidders could see renewed short interest, pulling price action back to the downside in the near term.

EUR/USD daily chart

Frequently asked questions about the euro

Euro is the currency for the 20 countries of the European Union that belong to the Eurozone. It is the second most heavily traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, representing an estimated discount of 30% on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The main mandate of the ECB is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is raising or lowering interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of national banks in the euro area and 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 element for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its peers will typically benefit the euro as it makes the region more attractive as a place for global investors to park their money.

Data releases measure the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and services PMI, 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 may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if the 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 particularly significant as they account for 75% of the euro area economy.

Another important piece of information 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 in a given period. If a country produces highly sought-after exports, then its currency will only gain in value from the additional demand created by foreign buyers wanting to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

VaselineAugust 23, 2024

0 4 minutes read