The EUR/USD pair recovered its recent losses recorded in the previous session, trading around the 1.1760 level during Asian trading hours on Friday. Traders will likely be monitoring German Manufacturing Purchasing Managers’ Index (PMI) data later today.
The Euro (EUR) finds support against the US Dollar (USD) as monetary policy paths between the European Central Bank (ECB) and the US Federal Reserve (Fed) diverge. The European Central Bank left interest rates unchanged in December and indicated they were likely to remain steady for an extended period. European Central Bank President Christine Lagarde stressed that high uncertainty makes it difficult to provide clear forward guidance on future policy moves.
EUR/USD rises as the US dollar suffers amid expectations of two additional interest rate cuts from the Federal Reserve in 2026, which will narrow interest rate spreads with other major central banks. Markets are preparing for US President Donald Trump to nominate a new Federal Reserve Chairman to replace Jerome Powell when his term ends in May, a move that could push monetary policy towards lower interest rates.
The CME FedWatch tool shows an 85.1% probability of holding interest rates at the Fed’s January meeting, up from 84.5% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 14.9% from 15.5% a week ago.
The Fed cut interest rates by 25 basis points at its December meeting, bringing the target range to 3.50%-3.75%. The Fed cut cumulative interest rates by 75 basis points in 2025 amid a cool labor market and still-high inflation.
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.
