- EUR/USD holds key support at 1.1000 as the Fed is expected to cut interest rates in September.
- Moderate growth in the US consumer price index (CPI) in July boosted confidence that inflation remains on track to reach the bank’s 2% target.
- The ECB is expected to avoid aggressive interest rate cuts.
The EUR/USD pair is trading in a tight range above the psychological support of 1.1000 in Thursday’s European session. The major currency pair is facing some mild profit-taking after hitting a new over seven-month high at 1.1050.
However, the short-term outlook for the key currency remains stable as the Federal Reserve (Fed) is widely expected to ease its restrictive monetary policy stance in September, which it has maintained since March 2022.
US consumer price index (CPI) data for July released on Wednesday boosted investor confidence in a Fed rate cut in September as it showed that price pressures are on track to rise back to the desired 2% level. The annual core CPI, which excludes volatile food and energy prices and is one of the inflation indicators most closely watched by Fed policymakers, rose 3.2%, as expected, from the previous release of 3.3%. Over the same period, the headline CPI slowed to 2.9% from estimates and the previous release of 3%.
With the Fed’s rate cuts taking center stage, market sentiment has turned favorable for risky assets. S&P 500 futures have posted decent gains in the European session. The US dollar index (DXY), which tracks the greenback’s value against six other major currencies, is hovering above the weekly low of 102.27.
Meanwhile, investors are awaiting US retail sales data for July, due at 12:30 GMT. Retail sales data, a key indicator of consumer spending, is expected to have risen 0.3% after remaining unchanged in June.
In the Eurozone, the Euro (EUR) remains broadly stable as investors expect the European Central Bank (ECB) to continue the cycle of monetary easing with a calibrated approach. ECB policymakers have refrained from committing to a predefined rate cut path to avoid the risk of a renewed acceleration in price pressures.
Frequently asked questions about the US dollar
The U.S. dollar (USD) is the official currency of the United States of America and the de facto currency of a significant number of other countries where it circulates alongside local banknotes. It is the most widely traded currency in the world, accounting for over 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to 2022 data. After World War II, the USD replaced the British pound as the world’s reserve currency. For most of its history, the U.S. dollar was backed by gold until 1971, when the Bretton Woods Agreement abolished the gold standard.
The single most important factor affecting the value of the U.S. dollar is monetary policy, which is crafted by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is adjusting interest rates. If prices rise too quickly and inflation is above the Fed’s 2% target, the Fed will raise interest rates, benefiting the USD value. If inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates, weighing on the greenback.
In extreme situations, the Federal Reserve can also print more dollars and engage in quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend money to each other (for fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to produce the desired result. It was the Fed’s weapon of choice in battling the credit crunch that occurred during the great financial crisis of 2008. It involves the Fed printing more dollars and using them to buy U.S. Treasury bonds, predominantly from financial institutions. QE typically results in a weaker U.S. dollar.
Quantitative tightening (QT) is the reverse process, where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital from the maturing bonds in new purchases. This usually has a positive effect on the U.S. dollar.
