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October low revisited: Euro awaits ECB
- Five consecutive declines end as EUR/USD rebounds from its 14 October low.
- A 10-2 vote kept Fed rates unchanged, with Fed Governor Cook dissenting for the first time in favour of a hike.
- 0.2% growth is forecast for third-quarter euro area GDP, due Friday, marking a slowdown.
Around 1.1150 is where EUR/USD has recovered to. The pair is heading for its first advance in six sessions ahead of Thursday's European Central Bank (ECB) decision. It remains only modestly above a low tested on both 14 October and Wednesday. The latest test, slightly above 1.1100, came after five consecutive session losses.
A quarter-point hike was the preference of Cleveland Fed President Hammack and Fed Governor Cook, but the Fed left rates unchanged in a 10-2 vote. For Cook, it was her first dissent since joining in 2022. The policy statement described US growth as strong, an upgrade from solid. Traders subsequently increased the probability of a December Fed hike from 75% to about 81%, affecting the US side of the EUR/USD interest-rate differential.
During Fed Chair Warsh's press conference, EUR/USD reached its session peak. Warsh said he does not believe in forward guidance outside a crisis and noted that market-determined interest rates, which drive Dollar trading, had moved lower. The two votes favouring a hike and the stronger assessment of US growth therefore coincided with EUR/USD's only rising session in six.
2.5% deposit rate forecast: ECB and GDP schedule
At 13:15 GMT on Thursday, the ECB announces its decision, determining the euro side of the pair's interest-rate differential. The deposit rate is expected to remain at 2.5%. Questions to ECB President Lagarde follow at 13:45 GMT. Friday brings third-quarter euro area growth at 10:00 GMT, with a slowdown to 0.2% forecast from 0.6%.
Before the ECB announcement, third-quarter US Gross Domestic Product (GDP) is scheduled for Thursday at 12:30 GMT. Forecasts point to an annualised 3.2% expansion, up from 2.2%. For the same quarter, the projections therefore show US growth accelerating while euro area growth loses pace.
1.1250 range ceiling: EUR/USD technical picture
Since early October, a ceiling slightly above 1.1250 has capped EUR/USD's trading range. This is the latest phase of its retreat from the August peak just above 1.1700. The pair has remained below its 50-day Exponential Moving Average (EMA) since mid-September; that average now sits just below 1.1350. The 200-day EMA stands just under 1.1500.
EUR/USD: daily price chart
Euro: key questions answered
Across the Eurozone, 20 European Union countries use the Euro as their currency. Only the US Dollar is traded more heavily worldwide. The Euro represented 31% of all foreign exchange transactions in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and directing monetary policy. Maintaining price stability is its central mandate, whether through controlling inflation or supporting growth. Interest-rate increases and cuts are its main policy instrument. The Euro generally benefits from relatively high rates or expectations of higher rates; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of Eurozone national banks and six permanent members, among them ECB President Christine Lagarde.
For the Euro, the Harmonised Index of Consumer Prices (HICP), which measures Eurozone inflation, is a key economic indicator. An inflation reading above expectations, particularly one exceeding the ECB's 2% target, obliges the central bank to increase interest rates to regain control of prices. By making the region a more attractive destination for international capital, interest rates that are relatively high compared with those of its counterparts generally support the Euro.
The Euro can respond to economic releases because they reveal the economy's health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all shape the single currency's direction. Economic strength supports the Euro by drawing in more overseas investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular attention is paid to Germany, France, Italy and Spain. As the euro area's four largest economies, they together represent 75% of the Eurozone economy.
The Trade Balance is another key release for the Euro, recording the gap between a country's export earnings and its import spending over a specified period. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers purchase those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.
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