EUR/USD remains on the back foot on Wednesday as second-tier US economic data provided modest support to the US Dollar (USD). Meanwhile, the Euro (EUR) was already trading on the defensive after the Financial Times reported that European Central Bank (ECB) President Christine Lagarde could step down before her term ends in October 2027, though there has been no official confirmation.
At the time of writing, EUR/USD is trading around 1.1817, down nearly 0.25% on the day.
US data showed Industrial Production rose 0.7% in January, beating expectations of a 0.4% increase and accelerating from December’s revised 0.2% gain (previously reported as 0.4%).
Durable Goods Orders declined 1.4% in December, a smaller drop than the 2.0% expected, after November’s strong 5.4% rise. Orders excluding Defense fell 2.5%, following a sharp 6.6% gain previously. Meanwhile, core orders excluding Transportation rose 0.9%, beating the 0.3% forecast and accelerating from November’s 0.5% increase.
Building Permits rose to 1.448 million in December, up from 1.388 million previously and above the 1.40 million forecast. Housing Starts also increased to 1.404 million, beating expectations of 1.33 million and improving from November’s 1.322 million.
In reaction to the data, the US Dollar extended its recovery, with the Dollar Index (DXY) climbing to around 97.45, up nearly 0.35% on the day.
Attention now shifts to the FOMC’s January Meeting Minutes, scheduled for release later in the American session, which could offer fresh insight into the Fed’s monetary policy stance.
At that meeting, the Fed left its benchmark interest rate unchanged at 3.50%-3.75% in a 10-2 vote. In its statement, policymakers said the economy continues to expand at a solid pace, while noting that job gains remain subdued and the unemployment rate appears to be stabilising. Officials also acknowledged that inflation is still somewhat elevated and cautioned that uncertainty around the economic outlook remains high.
Since that meeting, US labour market data have shown resilience. Nonfarm Payrolls (NFP) increased by 130K in January, rebounding from 48K in December, while the Unemployment Rate edged down to 4.3% from 4.4%.
At the same time, Headline Consumer Price Index (CPI) rose 0.2% on a monthly basis in January, slowing from 0.3% in December. On an annual basis, inflation eased to 2.4% from 2.7%.
Stabilisation in labour market conditions reduces the urgency for a near-term Fed rate cut. However, with inflation pressure easing, markets are still pricing in around 60 basis points of rate cuts later in the year.
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.
