EUR/USD extends losses as US-Iran war boosts US Dollar demand
- EUR/USD extends losses on Thursday as the escalating US-Iran war keeps the US Dollar firmly supported.
- Rising Oil prices amid growing security risks in the Strait of Hormuz fuel inflation concerns.
- Traders trim Fed rate-cut bets while markets price in an ECB rate hike as soon as July.
The Euro (EUR) remains on the back foot against the US Dollar (USD) on Thursday, with EUR/USD extending losses for the third straight day as the escalating US-Iran war keeps the Greenback firmly bid. At the time of writing, the pair is trading around 1.1525, having retraced all the gains recorded earlier this week.
The US-Iran war continues to dominate market sentiment, with no clear signs of de-escalation as the conflict enters its thirteenth day. Oil prices are rising as security risks in the Strait of Hormuz increase, a key route for global Oil shipments. In the latest developments, Iran reportedly targeted two Oil tankers in the region, raising concerns about further disruptions to global energy supply.
As a result, traders are rotating into the US Dollar, which tends to strengthen during periods of global uncertainty due to its liquidity and safe-haven status. The Greenback gained further support on Thursday as Initial Jobless Claims for the week ending March 7 fell to 213K, below the 215K forecast, while Housing Starts rose to 1.487M, exceeding expectations of 1.35M.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.50, up nearly 0.22% on the day.
Meanwhile, rising Oil prices are fueling inflationary pressure, prompting traders to reassess the monetary policy path of major central banks.
Markets are now fully pricing in an European Central Bank (ECB) rate hike as soon as the July meeting. However, the Euro is struggling to draw meaningful support as higher energy prices threaten the Eurozone’s economic outlook due to the region’s heavy reliance on imported energy.
Across the Atlantic, traders continue to trim Federal Reserve (Fed) interest rate-cut bets, with markets now pricing in around 25-30 basis points (bps) of easing by December, down from more than 50 bps before the war began, according to the CME FedWatch Tool.
The latest US inflation data released on Wednesday also supports a cautious Fed stance, as price pressures remain sticky and well above the central bank’s 2% target, with markets now turning their focus to the Personal Consumption Expenditures (PCE) Price Index report due on Friday.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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