The euro (EUR) gains against the US dollar (USD) on Thursday, supported by a much weaker dollar as investors shrug off solid US economic data. At the time of writing, EUR/USD is trading around 1.1742, reversing losses from the previous day.
Fresh data from the US showed stable inflation and stable growth. Core personal consumption spending (QoQ) for Q3 increased 2.9%, in line with expectations and unchanged from the previous quarter.
Annualized Gross Domestic Product for the third quarter increased by 4.4%, exceeding forecasts of 4.3%, up from 3.8% in the second quarter. Meanwhile, jobless claims fell to 200,000, well below expectations of 212,000, while last week’s figures were revised down to 199,000. from 198 thousand
Core PCE inflation rose 0.2% m/m in November, in line with expectations and unchanged from October, while the annual interest rate rose to 2.8% from 2.7%. Core PCE also rose 0.2% on the month, in line with forecasts, with the annual rate rising to 2.8% from 2.7%.
Personal income rose 0.3%, below expectations of 0.4% but was stronger than October’s 0.1% gain, while personal spending was unchanged at 0.5%.
From a monetary policy perspective, the data reinforced expectations that the Federal Reserve (Fed) can afford to be patient. Markets widely expect no change in interest rates at the January 27-28 meeting, and the latest Reuters poll shows 55 out of 100 economists expect the first rate cut to come in June or later.
Dovish Fed expectations, coupled with persistent concerns about political interference with the Fed’s independence, continue to weigh on the U.S. dollar, limiting any meaningful recovery.
The U.S. Dollar Index (DXY), which tracks the value of the dollar against a basket of six major currencies, is trading at around 99.37, down about 0.41%.
Markets also welcomed an easing in trade tensions between the U.S. and the European Union (EU) after U.S. President Donald Trump withdrew tariffs scheduled to come into force on February 1, following what he described as a “very productive meeting” with NATO Secretary General Mark Rutte that resulted in a framework agreement on Greenland and the Arctic region.
Regarding the euro, the latest monetary policy accounts from the European Central Bank (ECB) showed that policymakers are in no rush to adjust interest rates. Officials noted that the inflation outlook “continues to be good,” while economic activity in the euro zone has proven “more resilient than previously expected.” Members also stressed the importance of maintaining “full optionality in either direction” at future meetings.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two missions: achieving price stability and promoting full employment. The basic tool for achieving these goals is adjusting interest rates. When prices rise too speedy and inflation exceeds the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US dollar (USD) because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate becomes too high, the Fed may lower interest rates to encourage borrowing, which will negatively impact the dollar.
The Federal Reserve (Fed) holds eight policy meetings a year, during which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials attend the FOMC meeting – 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 exploit a policy called quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in the gridlocked financial system. This is an unusual policy measure used during crises or when inflation is extremely low. This 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-quality bonds from financial institutions. QE tends to weaken the US dollar.
Quantitative Tightening (QT) is the reverse process of QE, in which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest capital from the bonds it holds at maturity to purchase novel bonds. This is usually positive for the value of the US dollar.
