The EUR/USD pair maintains strength after four days of modest losses, trading near 1.1770 during Asian business hours on Tuesday. The pair remains steady as the US Dollar (USD) moves slightly amid market caution ahead of the minutes of the December Federal Open Market Committee (FOMC) meeting scheduled for later today, which could provide insight into the Fed’s 2026 outlook.
EUR/USD may rise as the US dollar faces challenges amid continued expectations of two additional interest rate cuts by the Fed in 2026. The CME FedWatch tool shows an 83.9% probability of interest rates being held at the Fed’s January meeting, up from 80.1% the previous week. Meanwhile, the probability of a 25 basis point rate cut fell to 16.1% from 19.9% a week ago.
The US central bank cut interest rates by 25 basis points at the 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.
The Euro may face challenges as risk appetite increases due to the unstable situation between Ukraine and Russia. The Russian Foreign Minister said that Moscow’s negotiating position will change after the alleged attacks on President Vladimir Putin’s residence.
However, the downside for the euro could be limited as markets reflect diverging policy paths between the European Central Bank (ECB) and the US Federal Reserve. The European Central Bank held interest rates steady in December and signaled they were likely to remain unchanged for some time, with its President Christine Lagarde noting that rising uncertainty makes forward guidance on future interest rate movements difficult.
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.
