At a Glance
- The EUR/USD pair is trading lower, approaching the 1.1630 level, influenced by a strengthened US Dollar.
- Hopes for a swift resolution to the US government shutdown are bolstering the USD.
- Anticipation of a trade deal between the US and China is also a contributing factor to USD strength.
- Investors are awaiting US CPI data for September, which could impact Federal Reserve policy outlook.
- The Euro is showing resilience against other currencies ahead of a speech by ECB President Christine Lagarde.
Market Movements and Influencing Factors
The EUR/USD currency pair has extended its downward trend for the second consecutive day, dropping to near 1.1630 during the early Asian trading session. This decline is primarily driven by the strengthening US Dollar (USD), which is gaining traction on expectations that the ongoing United States government shutdown will conclude this week.
At the time of reporting, the US Dollar Index (DXY), a benchmark that tracks the Greenback’s performance against a basket of six major currencies, has seen an upward movement, nearing the 98.70 mark.
White House economic advisor Kevin Hassett commented on Monday during an interview with CNBC, suggesting that the Schumer shutdown is likely to end within the current week. Hassett’s remarks specifically referenced the Democratic leader, Chuck Schumer.
Another significant factor contributing to the US Dollar’s strength is the growing optimism among market participants regarding a potential consensus between the United States and China. This optimism stems from the upcoming meeting between President Donald Trump and Chinese leader Xi Jinping later this month at the Asia-Pacific Economic Cooperation (APEC) summit in South Korea.
Upcoming Economic Data and Central Bank Focus
On the domestic economic front, traders are keenly awaiting the release of the delayed US Consumer Price Index (CPI) data for September. This crucial inflation report is scheduled for publication on Friday and is expected to significantly influence market sentiment regarding the Federal Reserve’s (Fed) future monetary policy decisions.
💡 While the US Dollar has found support against the Euro (EUR), the latter is experiencing gains against its other currency counterparts. This is occurring ahead of a highly anticipated speech from European Central Bank (ECB) President Christine Lagarde, scheduled for 11:00 GMT. Market participants will be looking to Lagarde’s remarks for insights into the duration of the ECB’s current interest rate policy and the potential near-term impact of the ban on Russian gas imports on inflation and the broader economy.
Understanding the US Dollar’s Role and Influences
What is the US Dollar?
The US Dollar (USD) is the official legal tender of the United States of America. It also serves as the de facto currency in numerous other nations, circulating alongside local currencies. The USD holds the position of the most heavily traded currency globally, constituting over 88% of all foreign exchange turnover, averaging approximately $6.6 trillion in daily transactions according to 2022 data.
⚡ Following World War II, the USD superseded the British Pound as the world’s primary reserve currency. For much of its history, the US Dollar was backed by gold. However, the Bretton Woods Agreement in 1971 marked the end of the gold standard.
Key Factors Influencing the US Dollar’s Value
The most critical determinant of the US Dollar’s value is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed operates with two main objectives: achieving price stability (controlling inflation) and promoting full employment. Its primary instrument for accomplishing these goals is the adjustment of interest rates.
📊 When prices escalate too rapidly and inflation surpasses the Fed’s 2% target, the Fed typically raises interest rates, which tends to strengthen the USD. Conversely, if inflation falls below 2% or the unemployment rate is excessively high, the Fed may lower interest rates, exerting downward pressure on the Greenback.
Federal Reserve’s Quantitative Policies
In extraordinary circumstances, the Federal Reserve possesses the authority to increase the money supply by printing more Dollars and implementing quantitative easing (QE). QE is a non-standard policy designed to significantly boost the flow of credit within a stagnant financial system.
📍 It is typically employed when credit markets freeze due to a lack of interbank lending, often driven by fears of counterparty default. This measure is considered a last resort when simply lowering interest rates is deemed insufficient to achieve the desired economic outcome. The Fed notably utilized QE as a primary tool to counteract the credit crunch experienced during the 2008 Great Financial Crisis. This process involves the Fed creating new Dollars to purchase U.S. government bonds, primarily from financial institutions, which generally leads to a depreciation of the US Dollar.
⚡ Quantitative tightening (QT) represents the inverse of QE. During QT, the Federal Reserve ceases purchasing bonds from financial institutions and refrains from reinvesting the principal from maturing bonds into new purchases. This process is generally considered supportive of the US Dollar’s strength.
Final Thoughts
The EUR/USD pair is currently experiencing downward pressure, influenced by a rising US Dollar driven by optimism over the US government shutdown’s resolution and potential US-China trade progress. Investors are closely watching upcoming US inflation data and ECB President Lagarde’s remarks for further currency market direction.