EUR/USD softens below 1.1650 as Middle East turmoil boosts US Dollar
- EUR/USD softens to around 1.1620 in Tuesday’s early Asian session.
- The ongoing conflict in the Middle East supports the US dollar, a safe-haven currency.
- Rising Oil prices prompt traders to reassess the ECB monetary policy outlook.
The EUR/USD pair loses ground to near 1.1620 during the early Asian session on Tuesday. The US Dollar (USD) edges higher against the Euro (EUR) on fears that a prolonged conflict in the Middle East could disrupt global energy supplies and weigh on economic growth.
Iran’s Islamic Revolutionary Guard Corps (IRGC) said that Tehran will determine when the war ends, not the United States (US). The IRGC warned that if US and Israeli attacks continue, Iran could block regional oil exports. Meanwhile, US President Donald Trump stated late Monday that he plans to waive oil-related sanctions, have the US Navy escort tankers through the Strait of Hormuz and predicted the war with Iran would resolve “very soon.”
Uncertainty and signs of no resolution between the US and Iran continue to boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.
As Europe is a major net importer of energy, higher crude oil prices could push inflation higher in the region while weighing on economic growth, raising stagflation risks. Markets are now pricing in that the European Central Bank (ECB) could deliver up to two 25-basis-point (bps) rate increases this year, compared with earlier expectations that rates would remain unchanged through 2026, according to Reuters.
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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