- EUR/USD trades stronger near 1.1080 in Friday’s early Asian session.
- US GDP expanded more than expected in Q2.
- Cooling inflation from Germany and Spain support the case for ECB rate cut in September.
The EUR/USD pair recovers some lost ground around 1.1080, snapping the two-day losing streak on Friday during the early Asian session. However, the upside might be limited as traders might prefer to wait on the sidelines ahead of the flash estimate of the Eurozone July Harmonized Index of Consumer Prices (HICP) and the US July Personal Consumption Expenditure (PCE) Price Index.
The US Gross Domestic Product (GDP) growth rate rose at an annual rate of 3.0% in the second quarter (Q2), the Department of Commerce reported in its second estimate released on Thursday. The figure was better than the forecast and the initial estimate of 2.8%.
The report suggested that the US could avoid recession and dampen the hope for a larger 50 basis-point (bp) rate cut in September by the Federal Reserve (Fed). This, in turn, provides some support to the US Dollar (USD). Financial markets are now pricing in nearly 66% of a 25 basis points (bps) rate cut in September, but the chance of a deeper rate cut stands at 34%, down from 36.5% before the US GDP data, according to the CME FedWatch Tool.
Across the pond, the Consumer Price Index (CPI) data from Germany and Spain showed that inflation looks to have cooled further in August, prompting the expectation of an interest rate cut by the European Central Bank (ECB) and undermining the Euro (EUR). ING’s global head of macroeconomics, Carsten Brzeski, said that the outcome was “great news for the ECB” and further stated that a slowing economy and cooling inflation make a “perfect macro backdrop” for lower rates. Nonetheless, emphasized that service inflation isn’t dead yet.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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