The EUR/USD pair recorded modest gains around 1.1710 during the early Asian session on Monday. The euro rose against the US dollar after the European Central Bank left interest rates unchanged and took a more positive view on the euro zone economy, which has shown resilience in the face of global trade shocks. Financial markets are likely to remain weak as traders take profits ahead of the long holiday period.
The European Central Bank has kept key interest rates steady at 2.0% since June, and its latest pause last week also came with upgrades to growth and inflation forecasts. Traders expect a long pause on interest rates until at least June after European Central Bank President Christine Lagarde signaled extreme uncertainty and avoided forward guidance. Signs that the interest rate cutting cycle is coming to an end could provide some support to the common currency against the US Dollar (USD) in the near term.
Across the pond, the Federal Reserve (Fed) cut its widely expected interest rate by 25 basis points in December, bringing the federal funds rate to 3.50-3.75%. Federal Reserve Chairman Jerome Powell indicated that a rate hike is unlikely in the near future and that the US central bank is in a “wait and see” mode to assess incoming economic data.
The summary of economic forecasts, or so-called “point chart”, indicated the average forecast for just one additional rate cut in 2026. However, markets are now forecasting the possibility of two or more rate cuts next year, according to the CME FedWatch tool. This, in turn, could undermine the US dollar and act as a tailwind for the major pair.
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.
