Euro weakens below 1.1650 as US military carries out new strikes in Iran
- EUR/USD softens to near 1.1620 in Thursday’s early Asian session.
- The US carried out new strikes in Iran against a military site.
- Top ECB officials lay groundwork for June rate hike.
The EUR/USD pair trades in negative territory around 1.1620 during the early Asian session on Thursday. Escalating tensions between the United States (US) and Iran continue to weigh on riskier assets, such as the Euro (EUR), against the US Dollar (USD). The US April Personal Consumption Expenditures (PCE) Price Index inflation report will take center stage later in the day.
Reuters reported on Wednesday that the US military carried out new strikes in Iran targeting a military site that posed a threat to US forces and commercial traffic in the Strait of Hormuz. The source also said that the US military has also intercepted and shot down multiple Iranian drones that posed a similar threat.
Separately, Fars News Agency reported that three explosions were heard east of Bandar Abbas and air defences were activated for several minutes. Signs of rising tensions in the Middle East and a lack of progress in the US-Iran peace deal could provide support for a safe-haven currency such as the Greenback and act as a headwind for the major pair.
On the other hand, hawkish comments from the European Central Bank (ECB) policymakers might help limit the shared currency’s losses. Francois Villeroy de Galhau said on Tuesday that the central bank “will do what is necessary” to keep inflation on target. Meanwhile, ECB board member Isabel Schnabel stated that the central bank should raise interest rates in June, even if ongoing peace talks with Iran yield a deal, as the conflict has been far longer than projected and high energy prices are spilling into the broader economy.
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.
Financial markets have fully priced in two hikes in the ECB's 2% deposit rate and see a nearly 50% chance of a third move over the next year. Economists are more cautious and see just two rates rise, followed by a cut in mid-2027, a Reuters poll showed.
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