EUR/USD maintains position around 1.0800 ahead of ECB policy decision
- EUR/USD remains steady as investors await the European Central Bank's interest rate decision on Thursday.
- The ECB is anticipated to cut rates by another 25 basis points, lowering the Main Refinancing Operations Rate to 2.65%.
- The US Dollar struggles after disappointing US private payroll data heightened concerns over slowing US economic growth.
EUR/USD remains steady after registering gains for the last three consecutive sessions, hovering around 1.0790 during Thursday’s Asian trading hours. However, the Euro may face headwinds as the European Central Bank (ECB) is widely expected to implement another 25 basis point rate cut later in the day. This move would bring the Main Refinancing Operations Rate down to 2.65% and lower the Deposit Facility Rate to 2.5%.
In Germany, the CDU/CSU and SPD, following their election victory, have agreed to ease the country’s strict borrowing regulations. The decision aims to support defense spending above 1% of GDP and includes plans to establish a €500 billion off-budget fund to finance infrastructure projects over the next ten years.
The EUR/USD pair benefits from improved risk sentiment, as investors assess the likelihood of tariff relief for Canada and Mexico. On Wednesday, the White House announced that President Trump would temporarily exempt automakers in these countries from newly imposed 25% tariffs for one month. Additionally, Bloomberg reports suggest that he may consider excluding certain agricultural products from these tariffs.
Despite the EUR/USD’s current strength, geopolitical risks remain a limiting factor. Late Wednesday, a Chinese foreign ministry spokesperson asserted that China is ready to engage in "any type" of war in response to Trump’s escalating trade tariffs, according to BBC.
Meanwhile, the Federal Reserve’s (Fed) March Beige Book carries heightened significance amid growing concerns about the economic repercussions of Trump’s trade policies. Even before the full enforcement of these measures, signs of strain within the US economy are beginning to surface.
Euro FAQs
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%).
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.