EUR/USD weakens to near 1.0350 on Fed hawkish cut, stronger US data
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Lallalit Srijandorn
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19 Dec @ 11:12 (GMT+0)

EUR/USD weakens to near 1.0350 on Fed hawkish cut, stronger US data

  • EUR/USD edges lower to 1.0360 in Friday’s early Asian session. 
  • The Fed’s cautious approach to easing and stronger US GDP data underpin the USD. 
  • The ECB may stay relatively dovish amid concerns over Eurozone economic growth. 

The EUR/USD pair trades with a mild negative bias around 1.0360 during the early Asian session on Friday. The major pair remains on the defensive as the US Federal Reserve (Fed) adopted a less dovish stance despite cutting interest rates by 25 basis points (bps) at its December meeting on Wednesday. Later on Friday, the release of the US Core Personal Consumption Expenditures (PCE) Price Index data will be in the spotlight. 

The Fed decided to cut the interest rates at its final meeting of this year and signaled a much slower monetary policy easing trajectory in 2025. The Summary of Economic Projections, or ‘dot-plot,’ showed only two rate cuts in 2025, down from the four they projected in September. This, in turn, might provide some support to the Greenback in the near term and act as a headwind for the major pair. 

Additionally, stronger-than-expected US third quarter GDP data showed the US economy grew at a 3.1% annual rate. This reading came in above the market consensus and the previous reading of 2.8%. 

Across the pond, the European Central Bank (ECB) is anticipated to cut the interest rate further by at least a full percentage point next year. The more dovish ECB easing policy than that of the Fed is likely to weigh on the Euro (EUR) against the Greenback. Analysts expect that the ECB may have to accelerate rate cuts in 2025 amid the economic concerns in the Eurozone, political instability, and Trump tariff threats, which might contribute to the EUR’s downside. 

Euro FAQs

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off 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 Eurozone. The ECB 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 the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment 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 but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release 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 over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.