EUR/USD extends its decline on Thursday, sliding to its lowest level since January 23 as fading expectations for near-term Federal Reserve (Fed) interest rate cuts support the US Dollar (USD) and weigh on the Euro (EUR). At the time of writing, the pair is trading around 1.1748, remaining on the back foot for the fourth consecutive day.
Upbeat US economic data further lifted the Greenback. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.00, its highest level since February 6.
Initial Jobless Claims fell to 206K for the week ending February 14, well below the 225K forecast and down from the previous 229K. The four-week moving average eased to 219K from 220K.
Meanwhile, the Philadelphia Fed Manufacturing Survey surged to 16.3 in February, beating expectations of 8.5 and improving from 12.6 in January.
However, the Goods and Services Trade Balance widened to $-70.3 billion in December, surpassing the $-55.5 billion deficit forecast and deteriorating from the previous month’s $-53 billion. Separately, the Goods Trade Balance posted a deficit of $-99.3 billion, widening from $-86.9 billion previously.
Attention now shifts to Friday’s US data docket, including the Core Personal Consumption Expenditures (PCE) Price Index, the advance estimate of fourth-quarter US Gross Domestic Product (GDP) and preliminary February Purchasing Managers Index (PMI) data.
On the monetary policy front, markets still expect nearly two rate cuts this year. However, the minutes from the Fed’s January meeting, released on Wednesday, showed policymakers are in no hurry to ease policy as inflation remains above the 2% target. Officials also noted that further rate hikes could be considered if inflationary pressure reaccelerates.
In contrast, the European Central Bank (ECB) is widely expected to keep interest rates unchanged through 2026. In the Eurozone, consumer confidence data due later in the US session will be in focus, before attention shifts to Friday’s flash PMI readings.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
