The euro fell in the European market on Monday, giving up a 13-month high against the U.S. dollar, hit earlier in Asian trading. This decline comes as a result of the relative activity in corrections and profit-taking witnessed in the market. The single currency had just surpassed the $1.12 mark, its highest level since July 2023, thanks to growing hopes that the interest rate gap between Europe and the United States would narrow. The euro hit a high of $1.1202, but fell to $1.1175, down 0.1% from the opening price of $1.1187. This change reflects corrections after the currency reached its highs, a sign that markets are starting to take profits after the European single currency rallied .The recent moves in the Euro market come after US Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole forum, which were less aggressive than expected. These statements contributed to strengthening the value of the euro in the past weeks, as it rose by 0.7% against the dollar in Friday trading, and the euro recorded a rise of 1.5% during the past week, making it record the fourth consecutive weekly gain and the largest Gain in 2024, specifically since November 2023. This rise is a result of intense activity in buying the euro as a strong alternative to the US dollar. On the monetary policy front, markets await the ECB’s interest rate announcements. Recent data show that inflation in Europe accelerated in July, reinforcing inflationary pressures on ECB monetary policymakers. There are widespread expectations that the ECB will cut interest rates by around 25 basis points before the end of the year. In contrast, investors expect The US Federal Reserve cuts interest rates by about 100 basis points.
Impact of the US interest rate cut on Euro prices
US Federal Reserve Chairman Jerome Powell said at the Jackson Hole Economic Forum on Friday that it is time to adjust monetary policy. Powell added that his confidence has increased that inflation is on a sustainable path to return to the 2% target. Powell’s comments come at a crucial time as traders almost completely price the prospects of the Federal Reserve cutting interest rates by around 100 basis points before the end of this year. These expectations of a rate cut have a significant impact on the gap between interest rates in Europe and the US, which currently stands at 125 basis points in favor of US interest rates. With the current state of interest rates, this gap is expected to narrow to 50 basis points before the end of the year, which could favor the appreciation of the EURUSD. Under these expectations, many analysts expect the euro’s performance to be significantly affected. According to Convera’s chief foreign exchange strategist, Ruta Prescinet, the momentum in the EURUSD pair is showing signs of fatigue, with it difficult to coss the $1.12 barrier for the first time since July 2023 .Presquint confirmed that aggressive bets on the interest cuts launched by the United States have overshadowed economic weakness in the US Leuro Recent events suggest that reducing the interest rate gap between the US and Europe could positively affect the euro. However, the actual performance of the euro may be complicated by the ongoing economic weakness in the eurozone which may limit the strength of the European currency.
How Euro Weakness Affects the European Economy
The current weakness of the euro can have multiple and complex effects on the European economy, as these effects can be reflected positively or negatively depending on the economic and financial context. First, in terms of positive effects, a weaker euro could boost exports from the eurozone. When the euro is weak against other currencies, European goods and services become cheaper for importers from abroad. This could lead to an increase in demand for European exports, which could support the growth of companies that rely heavily on international markets. Exporting companies could benefit from increased revenues due to higher demand for their products abroad, which could boost their growth and increase their competitiveness. Globally. On the other hand, a weaker euro could have significant negative effects on the European economy. One of the main effects is the rising cost of imports. When the euro falls, imported goods and services become more expensive, which can lead to an increase in the cost of raw materials and goods needed by European companies. This may lead to higher prices of goods and services in the domestic market, which may negatively affect the purchasing power of European consumers. Higher import costs can also contribute to higher inflation, as companies face challenges in controlling their prices amid rising production costs. Rising inflation may reduce consumers’ purchasing power, negatively impacting domestic demand and economic growth. In such circumstances, the economy may come under additional pressure, as private consumption can decline and businesses face challenges in maintaining their profit margins. Moreover, a weaker euro may affect foreign investment.
