- EUR/USD rallies after a dovish hold by the Fed weakens the US Dollar.
- The Fed continues to expect to make three 0.25% interest rate cuts in 2024, same as December.
- Eurozone PMI data to give the latest assessment of the region’s economic well being.
EUR/USD is trading back up in the 1.0900s on Thursday, after surging higher following the Federal Reserve (Fed) meeting. The US central bank maintained the policy status quo and slightly wrong-footed markets, which had been expecting a more hawkish shift in light of recent warmer-than-expected inflation.
The Fed left the Fed Funds Rate unchanged at 5.25%-5.50% as widely expected but in its accompanying forecast document, the Summary of Economic Projections (SEP), it continued to foresee rates falling to a median target of 4.6% in 2024, like it did in December.
This is equivalent to expecting around three 25 bps (0.25%) of rate cuts this year, even though some market participants had speculated it might reduce the number of cuts to two because of stickier-than-expected inflation.
It did, however, see less rate cuts in 2025, with the Fed Funds Rate falling to a median of only 3.9% rather than the 3.6% in the December SEP.
The Fed revised up its GDP forecast substantially, to 2.1% for 2024, from 1.4% in December – regarded by many as indicative of a “soft landing”.
The central bank’s preferred gauge of inflation, the Core Personal Consumption Expenditure (PCE) – Price Index, was revised up to 2.6% for 2024 from 2.4% in December.
In his press conference after the meeting, Federal Reserve Chairman Jerome Powell sought to play down the latest batch of hot inflation readings, saying only two months of data was not enough to dissuade the Fed from its path.
The overall interpretation was of a “dovish hold,” which resulted in the US Dollar selling off from overbought territory. The EUR/USD pair, which measures the buying power of a single Euro (EUR) in US Dollars (USD), rallied back up into familiar territory.
The next key release for the EUR/USD pair is the Eurozone March Purchasing Manager Indices (PMI) from S&P Global and Hamburg Commercial Bank (HCOB), out at 10:00 GMT on Thursday.
The flash estimate will provide the latest snapshot of economic health in the region.
HCOB Composite PMI for the Eurozone is expected to show a rise to 49.7 in March from 49.2 in February, the Services PMI is forecast to come out at 50.5 from 50.2, and Manufacturing at 47.0 from 46.5 previously,
A higher-than-expected result would likely be bullish for EUR/USD and vice versa for a lower-than-expected result.
EUR/USD reversed on a dime at around the level of the 200-day Simple Moving Average (SMA) in the 1.0830s and surged higher after the Fed meeting. It is now back up in the 1.0900s and seems to be trading in a range, with no real bias one way or another.
Euro versus US Dollar: 4-hour chart
The reversal at Wednesday’s lows continues to show momentum, however, and if price pushes higher it will probably meet resistance at the 1.0964 March 13 highs. If it breaks above them the March 8 highs for the month come into view at 1.0981. A break above them would turn the outlook bullish again.
Alternatively, the up move could petter out and price could also fall back down to target the 50-day SMA in the 1.0840s followed by the 200-day again in the 1.0830s.
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.
