Euro Holds its ground in European trade on Monday, recovering from recent lows against the dollar. Trading above the psychological barrier of $1.1, the euro is set to post its first profit in four days. This resilience comes amid receding inflationary pressures in the Eurozone, which has increased the likelihood of a rate cut by the European Central Bank (ECB) in September. Meanwhile, market participants are also closely watching the upcoming US payrolls report, which is expected to provide critical insights into the Federal Reserve’s next moves.
Current Price Movement
The EUR/USD currency pair saw a modest increase of 0.25% on Monday, reaching $1.1070. This recovery comes after the pair touched lows of $1.1040 on August 19. On Friday, the euro ended the trading session down by 0.3%, marking its third consecutive loss, primarily due to the latest Eurozone inflation data.
August Performance
Despite recent losses, the euro managed to rise 2% against the dollar in August. This represents its largest monthly gain in 2024, driven by growing expectations of a narrowing interest rate gap between the US and the Eurozone. The potential reduction in this gap has fueled optimism among euro bulls.
European Inflation Data
The latest inflation figures from the Eurozone indicate that price pressures are easing. In August, consumer prices increased by 2.2%, down from 2.6% in July. Core inflation, which excludes volatile items such as food and energy, rose by 2.8%, in line with expectations, but still lower than the 2.9% recorded in July.
Impact on ECB Policy
The deceleration in inflation has strengthened the case for a rate cut by the ECB. Following the release of the inflation data, the probability of a 0.25% rate cut in September increased from 60% to 80%. A reduction in interest rates would be aimed at supporting economic growth, especially as inflationary pressures continue to subside.
US Interest Rates and the Euro
The direction of US interest rates remains a significant factor influencing the EUR/USD exchange rate. According to the Fedwatch tool, there is currently a 69% chance of a 0.25% rate cut by the Federal Reserve in September, with a 31% probability of a more aggressive 0.5% cut. The upcoming US payrolls report, due on Friday, will be a key piece of data that could sway these probabilities and provide further direction for the dollar.
Potential Impact of US Rate Cuts on the Euro
A rate cut by the Federal Reserve, especially if it is larger than expected, could lead to a weaker dollar, making the euro more attractive to investors. Conversely, if the Fed holds off on a substantial rate cut, the dollar could regain strength, putting pressure on the euro.
Interest Rate Gap
Currently, the interest rate gap between the Eurozone and the US stands at 125 basis points in favor of the US. However, if the Federal Reserve were to implement a surprise 0.5% rate cut in September, this gap could narrow to 100 basis points. A smaller interest rate differential would likely reduce the attractiveness of the dollar relative to the euro, potentially providing further support for the European currency.
Conclusion
The euro’s recent performance has been shaped by a combination of easing inflation in the Eurozone and anticipation of changes in US monetary policy. As the euro holds above two-week lows, market participants are closely watching the upcoming US payrolls report, which will be crucial in determining the future direction of both the euro and the dollar. With the ECB likely to cut rates in September and the Fed also expected to ease policy, the EUR/USD pair could see further volatility in the coming weeks.
FAQs
- Why is the euro holding above $1.1 despite recent losses?
- The euro is holding above $1.1 due to easing inflationary pressures in the Eurozone and expectations of a rate cut by the ECB in September.
- What impact could the US payrolls report have on the euro?
- The US payrolls report could influence expectations for Federal Reserve rate cuts. A strong report might lead to a smaller rate cut, which could strengthen the dollar and pressure the euro
while a weaker report could have the opposite effect.
- The US payrolls report could influence expectations for Federal Reserve rate cuts. A strong report might lead to a smaller rate cut, which could strengthen the dollar and pressure the euro
- How does the interest rate gap between the Eurozone and the US affect the EUR/USD exchange rate?
- A larger interest rate gap in favor of the US generally makes the dollar more attractive to investors. However
if this gap narrows due to rate cuts by the Federal Reserve, the euro could gain ground against the dollar.
- A larger interest rate gap in favor of the US generally makes the dollar more attractive to investors. However
- What are the current expectations for ECB policy?
- The market currently expects a 0.25% rate cut by the ECB in September
with the probability of this outcome increasing after the latest inflation data.
- The market currently expects a 0.25% rate cut by the ECB in September
- Could the euro see further gains in the coming weeks?
- Yes, the euro could see further gains, especially if the Federal Reserve implements larger-than-expected rate cuts or if Eurozone economic data continues to improve.