- The EUR/USD pair may lose ground amid risk aversion ahead of President-elect Donald Trump’s inauguration on Monday.
- Traders remain cautious amid uncertainty surrounding Trump’s policy pledges, including imposing tariffs, expanding tax cuts, and deporting illegal immigrants.
- The euro faces difficulties as markets expect a 25 basis point interest rate cut at the European Central Bank’s next four policy meetings.
The EUR/USD pair is recouping some of its losses from the previous session, trading near 1.0280 during Asian trading hours. However, the pair’s upside may remain limited as the US Dollar (USD) could rise on market caution ahead of the inauguration of President-elect Donald Trump later today. The US market will remain closed on Monday for the Martin Luther King Jr. Day holiday.
Concerns about Trump’s policy pledges – such as imposing tariffs, extending tax cuts, and deporting illegal immigrants – have pushed up US Treasury yields and supported the US dollar ahead of the swearing-in. Analysts point out that the future interest rate path of the US Federal Reserve will depend on the extent to which the Trump administration implements these policies.
Investors will be closely watching Trump’s planned executive orders, which are expected to be issued shortly after he takes office. Meanwhile, the Fed is widely expected to hold interest rates steady at its January meeting, with a majority of economists polled by Reuters expecting a resumption of rate hikes in March.
The euro faces headwinds as the European Central Bank’s dovish outlook continues. Markets are pricing in a 25 basis point interest rate cut at each of the European Central Bank’s next four policy meetings, reflecting concerns about the euro zone’s economic outlook and expectations that inflationary pressures will remain under control.
The minutes of the ECB’s December meeting, released last week, indicated that policymakers were more focused on the pace of policy easing this year rather than pausing or ending the interest rate cutting cycle. It is worth noting that officials discussed the possibility of cutting interest rates by 50 basis points larger than usual to protect against downside risks to growth, which are exacerbated by global and domestic political uncertainty.
Frequently asked questions about the euro
The euro is the official currency of the nineteen European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of more than $2.2 trillion per day. The EUR/USD is the most widely traded currency pair in the world, accounting for a 30% discount on 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 euro area. The European Central Bank 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 to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – usually benefit the euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is one of the important economic indicators for the euro. If inflation rises beyond expected, especially if it is above the ECB’s 2% target, this forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts usually benefit the euro, because they make the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can affect the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer confidence 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 European Central Bank to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro will likely fall. Economic data for the four largest Eurozone economies (Germany, France, Italy and Spain) are of particular interest, as they represent 75% of the Eurozone economy.
Another important data 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 during a certain period. If a country produces highly desirable exports, its currency will gain value from the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
