EUR/USD: Euro’s struggle amid global uncertainty

EUR/USD is the shortened name for the euro versus the U.S. dollar pair, or cross, for the currencies of the United States of America (USA) and the European Union (EU). The currency pair shows how much one euro, also known as the base currency, costs in US dollars, the quote currency.

Another name for trading the EUR/USD currency pair is trading the “euro.” The EUR/USD exchange rate is expressed as 1 euro for every x USD. For instance, if the pair is trading at 1.50, one euro is worth 1.5 US dollars.

EUR/USD currency pair: the basics

The most traded pair globally is the EUR/USD pair. The two stand for two of the largest economies in the world. The value of the euro and the US dollar is influenced by many factors.This affects their relation to each other and other currencies.

The interest rate difference between the Federal Reserve (Fed) and the European Central Bank (ECB) can affect their currencies’ value.

When the Fed intervenes in open market operations to strengthen the U.S. dollar, the value of the EUR/USD cross may retrace or fall as a result of the dollar’s increased strength relative to the euro.

In the same way, negative news about the EU economy could negatively impact EUR/USD pair prices.

The euro selloff followed news of the government debt crisis and the influx of immigrants in Greece and Italy.This caused the exchange rate to plummet.

In 2022, for example, the EUR/USD pair famously fell below 1.00 for the first time ever.

This was due to the war in Ukraine and the resulting energy crisis, which negatively impacted the European currency.
Meanwhile, rising interest rates in the United States helped strengthen the American currency.

Euro currency: Brief History

The Maastricht Treaty gave rise to the euro currency in 1992. In 1999, it was first used as an accounting currency. The euro went into circulation in EU member states on January 1, 2002, and over the next few years, it replaced many of its members’ local currencies as the official currency of the EU.

As a result, many European economies are integrated and represented by the euro. All EU members enjoy this stabilisation of currency exchange rates and volatility. Second only to the US dollar, the euro is also one of the most traded currencies on the forex.

As of July 2024, 20 of the 27 EU members are using the euro.
This includes Croatia, the newest member, which joined the currency in January 2023.

According to the most recent ECB statistics, more than 29 billion euro banknotes are in circulation.
They have a total value of over €1.5 trillion.

Price chart analysis

In contrast to a stock price chart, the price represents the stock’s value.On a currency pair chart, the price shows the exchange rate between the two currencies.As a result, the chart’s directional indication matches the base currency.

Using the previous example, if a trader buys a long position in the EUR/USD at 1.50, the euro strengthens.
The US dollar weakens as the rate rises to 1.70.

The dollar is now weaker and/or the euro is stronger because it now costs $1.70 (more money) to buy one euro.

It is crucial to realise that the pair’s base currency is constant and always denotes one unit. Therefore, the rate does not reflect the source of strengthening or weakening. When the euro gains strength or the US dollar declines, the EUR/USD exchange rate may rise. Each of these circumstances causes the rate (price) to rise, and a price chart to rise in tandem.

EUR/USD outlook: Gains limited amid global risk and Fed/ECB decisions

The EUR/USD exchange rate has been navigating a turbulent market, with the euro exhibiting some resilience but confronting enormous challenges that may restrict future gains.

Following the postponement of US President Donald Trump’s proposed tariffs on Colombia, the euro was able to recover somewhat against the US dollar, breaking above 1.0500.

At first, the prospect of 25% tariffs raised serious concerns in the market.This was especially true as the US dollar gained strength amid growing trade tensions worldwide.

The decision to postpone these tariffs, however, has lessened some of the immediate pressure, which has caused the value of the US dollar to decline.

The outlook for EUR/USD is still cautious despite this brief reprieve. Investors are closely watching future monetary policy decisions from the Federal Reserve (Fed) and the European Central Bank (ECB). Given the ongoing economic difficulties in the eurozone, analysts generally expect the ECB to maintain its dovish stance and possibly lower interest rates.

Although inflation in the eurozone has stayed under control, the outlook for growth is bleak, which is probably why the ECB will provide more dovish guidance at its next meeting.

The market will closely monitor the Fed for any signs of potential rate cuts.However, analysts expect it to maintain its current interest rate stance with few surprises.

EUR/USD Struggles Amid Risk Aversion and Fed Policy Uncertainty

The ongoing sentiment of risk aversion that has taken over international markets further complicates the outlook. With US stock index futures trading well below zero, the tech stock selloff that started last week has heightened concerns about a wider market decline. The demand for safe-haven assets has surged as a result of this environment, supporting the US dollar.

The euro will probably find it difficult to sustain any significant upward momentum against the dollar. Which may continue to gain from its status as a safe haven, as long as risk sentiment is still weak.

The market will be closely watching a number of important economic indicators in addition to central bank decisions. Market expectations will be significantly influenced by orders for durable goods. The Personal Consumption Expenditures (PCE) price index, and the US’s preliminary Q4 GDP data.

EUR/USD Stuck in Range Amid Fed Uncertainty and Economic Risks

Investors will seek insights into the status of the US economy and potential changes in the Federal Reserve’s policy outlook.

The Fed may face mounting pressure to lower interest rates if the data indicates that the US economy is slowing or that inflation pressures are abating. Significant effects on the US dollar would result from this, and the EUR/USD pair might become more volatile.

Even though the EUR/USD pair recovered losses to hover around 1.0500 during the short-term bounce. Analysts are still pessimistic about the euro’s potential for a large gain.

The outlook for EUR/USD is probably going to be cautious rather than marked by big rallies due to the global risk environment, the dovish expectations for the ECB, and the uncertainty surrounding the Fed’s next actions. The euro might be under pressure once more if trade tensions reappear or if global economic data keeps indicating weakness.

Given the uncertainty surrounding the global economy, investors will continue to keep a close eye on developments throughout the week. Any sudden changes in policy could cause the currency pair to move sharply, as the Fed and ECB are both scheduled to make their announcements. But for the time being, there is little sign of a significant trend in either direction, and the EUR/USD pair seems to be trapped in a small range.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.