EUR/USD holds gains above 1.1500 ahead of US PCE inflation release
- EUR/USD gains ground around 1.1520 in Friday’s early Asian session.
- Iran's new supreme leader Khamenei vows to keep blocking the Strait of Hormuz.
- The Fed is widely expected to keep interest rates unchanged at its upcoming policy meeting next week.
The EUR/USD pair holds positive ground near 1.1520 during the early Asian trading hours on Friday. However, the potential upside might be limited amid escalating geopolitical tensions in the Middle East. The US Personal Consumption Expenditures (PCE) Price Index report for January will be in the spotlight later on Friday.
Surging oil prices could exert some selling pressure on the shared currency as the Eurozone is a major net importer of energy, making its economy highly vulnerable to "stagflationary" shocks. Iran’s new supreme leader, Mojtaba Khamenei, said that the crucial Strait of Hormuz should remain closed and that Iran will continue attacks on its Persian Gulf neighbors.
Earlier this week, Israel said it had launched a new wave of strikes against the Iranian capital, Tehran, and also targeted Hezbollah in Lebanon. Rising tensions in the Middle East could trigger a "rush into safe haven," boosting the US Dollar (USD) and creating a headwind for the major pair.
Futures markets and economists anticipated the US Federal Reserve (Fed) holding interest rates steady at its upcoming policy meeting next week. The benchmark federal funds rate currently sits at 3.50% – 3.75%. The US January PCE inflation data, which will be released on Friday, could offer some hints about the US interest rate path. If the report shows a softer-than-expected outcome, this could drag the Greenback lower against the Euro.
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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