In Friday’s early Asian session, the EUR/USD pair was seen trading stronger near 1.1080. This recovery came after the US Gross Domestic Product (GDP) growth rate rose at an annual rate of 3.0% in the second quarter (Q2). This figure surpassed expectations and the initial estimate of 2.8% which was released by the Department of Commerce. The strong US GDP data dampened the hopes for a larger 50 basis-point (bp) rate cut by the Federal Reserve (Fed) in September, leading to some support for the US Dollar (USD).
On the other hand, inflation data from Germany and Spain showed a cooling trend in August. This development supported the case for an interest rate cut by the European Central Bank (ECB) in September. ING’s global head of macroeconomics, Carsten Brzeski, highlighted that the slowing economy and cooling inflation provide a perfect macro backdrop for lower rates. Although service inflation remains a concern, the overall outlook points towards a potential rate cut by the ECB.
The European Central Bank (ECB) in Frankfurt, Germany, plays a crucial role in setting interest rates and managing monetary policy for the Eurozone. The primary objective of the ECB is to maintain price stability and keep inflation around 2%. By adjusting interest rates, the ECB aims to achieve this target and support the Euro. The ECB Governing Council makes decisions regarding monetary policy at regular meetings held throughout the year.
In certain situations, such as during economic crises or periods of low inflation, the ECB may resort to Quantitative Easing (QE). This policy involves the purchase of assets, such as government or corporate bonds, to inject liquidity into the financial system. On the contrary, Quantitative Tightening (QT) is implemented when the economy is recovering and inflation is on the rise. QT involves the reduction in asset purchases and the cessation of reinvesting matured bonds. Both QE and QT have implications on the strength of the Euro.
The recent data releases regarding US GDP and Eurozone inflation have had a significant impact on the EUR/USD pair. The stronger-than-expected US GDP growth rate provided support for the US Dollar, while cooling inflation in Europe raised expectations for an ECB rate cut. As central banks navigate through these factors to maintain price stability, traders and investors will closely monitor the monetary policy decisions and their effects on the currency markets.