Euro weakens below 1.1650 as Iran uncertainty supports US Dollar
- EUR/USD declines to near 1.1645 in Tuesday’s early Asian session.
- Trump said he called off a new Iran attack at the request of the Gulf states.
- ECB policymakers hinted at an interest rate hike to tame sticky inflation expectations.
The EUR/USD pair trades in negative territory around 1.1645 during the early Asian trading hours on Tuesday. The Euro (EUR) softens against the US Dollar (USD) amid persistent uncertainty in the Middle East surrounding Iran. European Central Bank (ECB) Chief Economist Philip Lane is set to speak later in the day.
US President Donald Trump said that he is holding off a military attack on Iran planned for Tuesday at the request of the leaders of Qatar, Saudi Arabia and the United Arab Emirates (UAE) as "serious negotiations are now taking place,” per BBC.
However, uncertainty remains high as Trump also warned that the US would be ready to "go forward with a full, large-scale attack on Iran on a moment's notice" if there was no acceptable deal. Signs of a prolonged conflict in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for the major pair in the near term.
Across the pond, hawkish comments from ECB policymakers could provide some support to the shared currency. ECB Governing Council member Yannis Stournaras said over the weekend that a modest ECB interest-rate increase could temper inflation without causing economic damage.
The majority of economists from the Reuters poll, around 85%, indicated that the ECB would raise its deposit rate by 25 basis points (bps) to 2.25% in June, up from just over half expecting that before the April meeting.
Euro FAQs
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.
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