Euro edges lower as traders await monetary policy decisions from Fed and ECB

A stronger US Dollar and concerns over France's public finances push EUR/USD modestly lower.
With the Fed and ECB both expected to leave interest rates unchanged, traders are awaiting this week's policy announcements.
December policy expectations could shift as markets assess forthcoming US inflation data and Eurozone growth figures.

A recovering US Dollar (USD) puts EUR/USD under modest pressure on Monday. The Euro (EUR) faces this week's monetary policy announcements from the Federal Reserve (Fed) and European Central Bank (ECB), while France's deteriorating fiscal outlook and strains in the bond market add to the currency's headwinds.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

1.1183 is the pair's approximate level at the time of writing, a decline of 0.17% on the day. Meanwhile, the US Dollar Index (DXY) stands near 101.99. The gauge, which measures the Greenback against a basket of six major currencies, dropped to 101.45 last week, its weakest reading since 1 October.

Wednesday brings the Fed's announcement, with the ECB following on Thursday. Markets widely anticipate unchanged interest rates from both institutions. Inflation is still above their respective 2% targets, and rising energy costs associated with Middle East tensions leave risks skewed upwards. Traders expect both central banks to raise rates in December, so policy guidance could prompt a larger market response than the rate decisions themselves.

Euro Under Pressure: Oil and Inflation Expectations Outrun ECB Response

Commerzbank identifies the latest increase in oil prices as a particular challenge for the Euro: “higher oil prices in particular should put greater pressure on the euro, as their impact on both inflation and economic activity in the euro area is more pronounced and, on balance, negative for the currency.” It highlights that “short-term inflation expectations have risen more strongly in the euro area than in the US,” adding that “higher inflation expectations are currently not being offset by a corresponding shift in relative interest-rate expectations.” Commerzbank's overall assessment is that “this is, in principle, a negative signal for the euro.”

Wider French spreads have yet to produce more widespread Eurozone stress, the bank adds: “this suggests that the market currently views the fiscal concerns largely as a French problem.” Commerzbank identifies “one possible explanation” as “the expectation that the ECB would intervene if contagion became more pronounced, thereby limiting the risk of broader fragmentation in the euro-area bond market.”

A full schedule of economic releases also has the potential to move EUR/USD this week, alongside the central bank announcements. In the US, Tuesday's calendar features the ADP employment report, September Durable Goods Orders, October Consumer Confidence and September New Home Sales. On Thursday, attention turns to September Personal Consumption Expenditures (PCE) inflation, the advance third-quarter Gross Domestic Product (GDP) estimate and weekly Initial Jobless Claims.

Thursday's Eurozone calendar includes October readings for business climate, consumer confidence and economic sentiment. Preliminary third-quarter GDP and the bloc's unemployment rate follow on Friday, together with Germany's preliminary October Consumer Price Index (CPI).

ECB: Key Questions

The ECB's Role and Its Impact on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank. It oversees the region's monetary policy and determines interest rates. Price stability is the ECB's core mandate, meaning inflation should remain around 2%. Adjusting interest rates upwards or downwards is its main means of meeting that objective. Higher relative interest rates typically support the Euro, while lower relative rates tend to weaken it. Monetary policy is decided by the ECB Governing Council, which meets eight times a year. The decision-makers comprise the heads of the Eurozone's national banks and six permanent members, among them ECB President Christine Lagarde.

Quantitative Easing (QE): How It Influences the Euro

When circumstances are extreme, the European Central Bank can deploy Quantitative Easing. Under QE, the ECB prints Euros to purchase assets from banks and other financial institutions, generally government or corporate bonds. This policy typically weakens the Euro. Used as a last resort, QE is an option when interest-rate cuts alone are unlikely to deliver price stability. The ECB deployed it during the Great Financial Crisis in 2009-11, again in 2015 as inflation stayed persistently low, and during the Covid pandemic.

Quantitative Tightening (QT): Implications for the Euro

Once economic recovery is under way and inflation begins to rise following QE, the reverse process, Quantitative tightening (QT), can be introduced. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds. Under QT, it ceases additional bond purchases and no longer reinvests principal from maturing bonds in its existing portfolio. QT is generally supportive of, or bullish for, the Euro.