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18 Feb 2025
EUR/USD falls toward 1.0450 as US Dollar strengthens amid rising Treasury yields
- EUR/USD declines as the US Dollar strengthens following three consecutive sessions of losses.
- Fed Governor Michelle Bowman warned that upside inflation risks persist, stressing the need for more clarity before considering rate cuts.
- The Euro faces downward pressure from the ECB's forecast of three additional rate cuts this year.
EUR/USD extends its losses for the second successive session, trading near 1.0460 during the Asian hours on Tuesday. This downside could be attributed to the improved US Dollar (USD) amid rising Treasury yields.
The US Dollar Index (DXY), which tracks the US Dollar's performance against six major currencies, edges higher after registering losses in the previous three successive sessions and trades around 106.90, while yields on 2-year and 10-year US Treasury bonds stand at 4.27% and 4.51%, respectively, at the time of writing.
Federal Reserve Governor Michelle Bowman stated on Monday that rising asset prices may have slowed the Fed’s recent progress on inflation. While Bowman expects inflation to decline, she cautioned that upside risks remain and emphasized the need for more certainty before considering rate cuts.
Meanwhile, Fed Governor Christopher Waller acknowledged late Monday that while inflation has improved, progress has been “excruciatingly” slow. Waller stressed that the Fed must not allow policy uncertainty to hinder data-driven decision-making.
The Euro faces downward pressure as several European Central Bank (ECB) officials remain comfortable with the outlook for three more rate cuts this year, following a 25 basis point reduction to 2.75% last month.
However, the Euro could gain support if a ceasefire in Ukraine is reached and gas supplies resume. A JP Morgan note suggests that the EUR/USD pair could appreciate by up to 5% under such circumstances.
Reports indicate that US President Donald Trump and Russian President Vladimir Putin have agreed to initiate negotiations to end the conflict. Officials from the Trump administration are scheduled to meet with their Russian counterparts in Saudi Arabia on Tuesday to discuss a potential peace agreement.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.