The EUR/USD pair trades with mild gains around 1.1725 during the early Asian session on Tuesday. However, the potential upside might be limited as market sentiment remains fragile due to stalled US-Iran peace talks. Markets might turn cautious ahead of the US Federal Reserve (Fed) and the European Central Bank (ECB) interest rate decisions later this week.
Iran offered to end its closure of the Strait of Hormuz if the US lifts its blockade on the country and ends the war in a proposal that would postpone discussions on the Islamic Republic’s nuclear program, per Bloomberg.
However, US President Donald Trump seems unlikely to accept the offer, and US Secretary of State Marco Rubio appeared to rule out any deal that excludes Iran’s nuclear program. Ongoing US-Iran tensions and the closure of the Strait of Hormuz could boost a safe-haven currency such as the US dollar (USD) and act as a headwind for the major pair.
The Federal Reserve (Fed) is widely expected to keep interest rates unchanged at its upcoming April policy meeting on Wednesday, maintaining the federal funds target range at 3.50% to 3.75%. This would mark the third consecutive hold.
Traders await Jerome Powell’s press conference after the policy meeting for fresh impetus. If Powell adopts a higher-for-longer stance or signals that rate hikes are back on the table, this could underpin the Greenback in the near term.
Across the pond, economists anticipate the ECB not making any moves at its meeting on Thursday and keeping its benchmark deposit rate at 2.0%, where it has been since June last year. Policymakers could adopt a wait-and-see approach amid high economic uncertainty caused by conflict in the Middle East. ECB official Martins Kazaks said last week that "we still have the large luxury of collecting data and forming our view.”
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.