The Federal Reserve is preparing to cut US interest rates.
The likelihood of a European interest rate cut in December is slim.
The euro rose in European trading on Tuesday against a basket of global currencies, resuming its gains against the US dollar after a three-day pause that saw profit-taking and a correction from a seven-week high. This move into positive territory was driven by strong investment demand for the single currency based on expectations of a narrowing interest rate gap between Europe and the United States.
The Federal Reserve is expected to announce on Wednesday its third cut in US interest rates this year, while improved economic activity in Europe paves the way for tougher decisions from the European Central Bank at its upcoming meetings.
Price overview
Euro exchange rate today: The euro rose against the dollar by 0.1% to ($1.1650), from today’s opening price of ($1.1637), and recorded a low of ($1.1632).
The euro ended Monday's trading down 0.15% against the dollar, its third consecutive daily loss, as profit-taking and corrections continued after trading at a seven-week high of $1.1682.
The US dollar index fell 0.1% on Tuesday, resuming its losses that had paused temporarily yesterday during a breather, reflecting a renewed decline in the US currency's levels against a basket of major and minor currencies.
The Federal Reserve's final monetary policy meeting of the year begins later today, with decisions expected tomorrow, Wednesday. Market expectations are currently stable regarding a cut in the benchmark interest rate of about 25 basis points, in the third consecutive US interest rate cut.
European interest rate
Data from last week showed an unexpected rise in the overall inflation rate in the Eurozone during November, indicating continued and entrenched inflationary pressures on the European Central Bank.
Following the inflation data, the money market's pricing in the likelihood of the European Central Bank cutting European interest rates by about 25 basis points in December fell from 25% to 5%.
Sources told Reuters that the European Central Bank is likely to keep interest rates unchanged at its meeting this December.
In order to reprice the above probabilities, investors are awaiting further economic data from the Eurozone ahead of the December 17-18 meeting.
Interest rate gap
The interest rate gap between Europe and the United States is currently stable at 185 points in favor of US interest rates, and is expected to shrink this week to 160 points following the anticipated decision from the Federal Reserve.
The narrowing of the interest rate gap between Europe and the United States to its lowest level since May 2022 is casting a positive shadow on the euro/US dollar exchange rate.
