The Euro (EUR) trades flat against the US Dollar (USD) on Friday, as traders show a muted reaction to the latest US economic data. At the time of writing, EUR/USD is hovering near 1.1750 and remains on track for its first weekly gain in three weeks amid sustained weakness in the Greenback.
Preliminary S&P Global Purchasing Managers Index (PMI) data showed the flash Composite PMI edging up to 52.8 in January from 52.7, while the Manufacturing PMI rose to 51.9 from 51.8, missing expectations of 52.1, and the Services PMI came in at 52.5, unchanged from December and below the 52.8 forecast.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said the survey points to annualized GDP growth of about 1.5% in December and January, adding that weak new business growth across manufacturing and services raises the risk that first-quarter growth could disappoint.
Meanwhile, the University of Michigan’s January survey showed a modest improvement in household sentiment. The Consumer Expectations Index rose to 57 from 55, while the Consumer Sentiment Index climbed to 56.4 from 54, both beating market forecasts.
Markets are also keeping a close eye on developments in EU-US relations, although tensions have eased after US President Donald Trump backed away from his threat to impose tariffs on several European countries following claims that a framework agreement had been reached in the Greenland dispute.
Attention is also turning to the Federal Reserve (Fed), after President Donald Trump said on Thursday that he has completed interviews for the next Fed Chair and confirmed that a decision has been made, adding that a formal announcement is likely before the end of January.
Investors are now looking ahead to the January 27-28 FOMC meeting, where policymakers are widely expected to leave rates unchanged at 3.50%-3.75%.
On the Euro side, preliminary HCOB PMI data showed the flash Composite PMI at 51.5 in January, slightly below expectations of 51.6 and unchanged from December. The Manufacturing PMI rose to 49.4 from 48.8, beating forecasts of 49.0, while the Services PMI slipped to 51.9 from 52.4, missing expectations of 52.8.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
