Euro strengthens ahead of Germany’s Trade Balance data
- EUR/USD rises as mixed Fed Minutes weaken the US Dollar.
- The US Dollar may rebound as US-Iran tensions boost expectations that the Fed will keep interest rates higher for longer.
- Iranian Speaker Mohammad Bagher Ghalibaf warned Washington that any further American action would trigger immediate retaliation.
EUR/USD extends its gains for the second successive day, trading around 1.1430 during the Asian hours on Thursday. The Euro (EUR) receives support against the US Dollar (USD) ahead of Germany’s Trade Balance data release later in the day. Traders will likely shift their focus to Friday’s Harmonized Index of Consumer Prices (HICP) data.
The US Dollar (USD) underperforms as the Federal Reserve’s (Fed) June Meeting Minutes underscored a widening rift among policymakers during Kevin Warsh’s debut meeting as FOMC Chairman on June 16–17. While a portion of the committee anticipated that the benchmark rate, currently holding at a target range of 3.50% to 3.75%, would likely end the year unchanged or lower, a hawkish contingent strongly argued that persistent price pressures would require a rate hike by year-end.
However, this internal friction has reinforced market expectations that the US central bank will keep interest rates higher for longer to combat stubborn inflation. Reflecting this hawkish shift, the CME FedWatch tool showed that swap traders have pushed the probability of a rate hike at the upcoming Fed meeting past 30%, up sharply from less than 20% just last week.
The Greenback's downside may be cushioned by a surge in safe-haven demand amid escalating geopolitical tensions between the US and Iran. Following two days of renewed US military strikes, Iranian Parliament Speaker Mohammad Bagher Ghalibaf issued a sharp warning to Washington, declaring that any further American action would trigger immediate retaliation. Crucially, Ghalibaf reiterated that access to the strategic Strait of Hormuz remains firmly under Iranian control, stoking fresh market anxieties over energy-driven supply shocks and resurgent global inflation.
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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