The euro (EUR) remains flat against the US dollar (USD) on Friday as investors show a muted reaction to the latest US economic data. At the time of writing, EUR/USD is hovering near 1.1750 and remains on track for its first weekly gain in three weeks amid continued US dollar weakness.
Preliminary S&P Global Purchasing Managers Index (PMI) data showed the preliminary Composite PMI rose to 52.8 from 52.7 in January, while the manufacturing PMI rose to 51.9 from 51.8, missing expectations of 52.1, and the services PMI was 52.5, unchanged from December and below the forecast of 52.8.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey showed annual GDP growth in December and January of about 1.5%, adding that feeble modern business growth in manufacturing and services industries raises the risk that first-quarter growth could disappoint.
Meanwhile, a January University of Michigan survey showed a slight improvement in household sentiment. The Consumer Expectations Index rose to 57 from 55, while the Consumer Sentiment Index rose to 56.4 from 54, both beating market forecasts.
Markets are also closely monitoring developments in EU-US relations, although tensions have eased after US President Donald Trump backtracked on threats to impose tariffs on several European countries over claims that a framework agreement had been reached on the Greenland dispute.
Attention is also turning to the Federal Reserve (Fed) after President Donald Trump announced on Thursday that he had completed interviews with the next Fed chair and confirmed that the decision had been made, adding that an official announcement would likely be made before the end of January.
Investors are now eagerly awaiting the FOMC meeting scheduled for January 27-28, where policymakers are widely expected to leave interest rates unchanged at 3.50-3.75%.
On the euro side, preliminary HCOB PMI data showed the flash Composite PMI for January was 51.5, slightly below expectations of 51.6 and unchanged from December. The manufacturing PMI rose to 49.4 from 48.8, beating forecasts of 49.0, while the services PMI fell to 51.9 from 52.4, beating expectations of 52.8.
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 rapid 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 operate 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 modern bonds. This is usually positive for the value of the US dollar.
