Euro edges higher above 1.1450 despite German political risks, hawkish Fed rhetoric
- EUR/USD posts modest gains around 1.1470 in Tuesday’s early Asian session.
- German political risks rise following two more disappointing state election outcomes.
- Fed's Musalem said more rate hikes are likely needed to combat inflation.
The EUR/USD pair trades with mild gains near 1.1470 during the early Asian trading hours on Tuesday. Middle East diplomacy hopes provide some support to the riskier assets such as the Euro (EUR) against the US Dollar (USD). Traders await the Fedspeak later on Tuesday for fresh impetus.
President Masoud Pezeshkian will lead an Iranian delegation at the United Nations General Assembly in New York on Tuesday, amid renewed hopes for a diplomatic solution to the Middle East conflict, per CNBC. Traders will closely monitor the geopolitical developments surrounding US-Iran talks.
US President Donald Trump said that he’d “probably” be open to meeting his Iranian counterpart on the sidelines of the UN General Assembly.
On the other hand, political risks in Germany could weigh on the shared currency. The far-right Alternative for Germany took first place in state elections in northeastern Germany on Sunday, with Chancellor Friedrich Merz's conservative party suffering its worst regional election defeat in postwar Germany, leaving him clinging to power.
Hawkish comments from the US Federal Reserve (Fed) officials could lift the Greenback and act as a headwind for the major pair. Chicago Fed President Austan Goolsbee said on Monday that US inflation may have moved beyond the tariff and energy price shocks of the last 18 months and is now being driven by strong demand as well, potentially requiring a faster pace of Fed rate increases.
Meanwhile, St. Louis Fed President Alberto Musalem stated that the US central bank will likely need to hike interest rates further to lower inflation resulting from strong demand as well as a commodity price shock that has moved beyond oil.
Euro sentiment pressured as German political risks rise
Analysts at MUFG warn that “the latest political and fiscal developments in European could contribute to undermining confidence in the Euro in the near-term.” They highlight that “there is a higher risk of political instability in Germany after two more disappointing state election results for the ruling parties over the weekend,” a backdrop that they believe could further weigh on investor sentiment toward the single currency.
Technical Analysis: EUR/USD keeps a bearish vibe under the 100-day SMA
In the daily chart, EUR/USD keeps a bearish near-term tone as spot holds beneath the 100-day simple moving average (SMA) and the Bollinger middle band. Price is only slightly above the lower Bollinger band, suggesting the pair is pressing the lower edge of its recent volatility envelope, while the Relative Strength Index (RSI) around 34.5 hovers just above oversold territory, hinting at persistent but not yet extreme downside pressure.
On the topside, initial resistance emerges at the 100-day SMA at 1.1545, followed by the Bollinger SMA centerline around 1.1575, with the upper Bollinger band near 1.1705 acting as a stronger cap if a corrective bounce develops. On the downside, the lower Bollinger band at 1.1445 offers immediate support; a decisive break below this level would open the door to an extension of the current bearish phase.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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