EUR/USD is trading flat around 1.1625 during the early European session on Wednesday. Markets are turning cautious ahead of the US Federal Reserve’s interest rate decision later on Wednesday, with a 25 basis point rate cut almost fully priced in.
The Federal Reserve is expected to cut interest rates again at its December meeting, to levels between 3.50% and 3.75%. This would be the lowest in about three years. Traders will be closely watching Fed Chairman Jerome Powell’s press conference, which could offer some hints about how many cuts the point plan will schedule next year. Any hawkish comments from Fed officials could strengthen the US dollar and act as a headwind for the major pair in the near term.
Investors have backed away from expectations of interest rate cuts in 2026 amid persistent inflation concerns and signs of a more resilient US economy. Data from the US Department of Labor’s JOLTS report on Tuesday showed that job openings rose to 7.67 million in October, beating expectations of 7.20 million. This upbeat jobs report is contributing to the dollar’s rise.
Around the world, the European Central Bank has adopted a cautious approach to monetary policy, indicating that the interest rate cutting cycle has stopped for the time being. This, in turn, could provide some support to the common currency against the US dollar. European Central Bank President Christine Lagarde said in her latest comments that the euro zone economy is in a “good place,” with inflation close to the 2% target. Lagarde stressed that the ECB does not pre-commit to a specific price path and will maintain a data-driven and meeting-by-meeting approach to future decisions.
Frequently asked questions about the euro
The euro is the official currency of the twenty 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.
