Euro weakens below 1.1650 as Trump yet to comment on 60-day truce extension plan
- EUR/USD softens to near 1.1635 in Friday’s early European session.
- The US and Iran are getting closer, but they have not yet reached a deal.
- ECB rate hike bets might help limit the Euro’s losses.
The EUR/USD pair loses momentum to around 1.1635 during the early European trading hours on Friday. Mixed signals surrounding the US-Iran peace deal remain the primary driver of volatility. Traders will keep an eye on the preliminary readings of Germany’s inflation later on Friday.
The White House confirmed that the US and Iran have reached an agreement on a memorandum of understanding (MoU) to extend the ceasefire for 60 days to allow for formal negotiations, but US President Donald Trump has yet to give his approval. US Vice-President JD Vance said on Friday that the US and Iran still need to work out several sticking points before an agreement on the war can be reached.
Traders will closely monitor the developments surrounding the Middle East conflict. Any signs of rising tensions between the US and Iran could weigh on the Euro (EUR) against the US Dollar (USD). On the other hand, progress on the peace deal could underpin the riskier assets such as the shared currency in the near term.
Hawkish remarks from the European Central Bank (ECB) policymakers could lift the EUR. 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.
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.
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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