EUR/USD declines to near 1.1600 amid Middle East war
- EUR/USD drifts lower to near 1.1615 in Tuesday’s early European session.
- The ongoing conflict in the Middle East boosts the Greenback, a safe-haven currency.
- The US February CPI inflation data will be in the spotlight later on Tuesday.
The EUR/USD pair edges lower to around 1.1615 during the early European session on Tuesday. Concerns over oil flow disruptions through the Strait of Hormuz boost the US Dollar (USD) as a safe-haven and create a headwind for the major pair.
Iran’s Islamic Revolutionary Guard Corps (IRGC) said that Tehran will determine when the war ends, not the US. The IRGC warned that if US and Israeli attacks continue, Iran could block regional oil exports. US President Donald Trump stated late Monday that if Iran does anything that stops the flow of oil through the Strait of Hormuz, it will be hit by the US.
"The dollar has been seen as the ultimate safe-haven due to its liquidity, while also being buoyed by the rise in oil prices,” said Matthew Ryan, head of market strategy at financial services firm Ebury. “We favor continued upside in the dollar so long as the war drags on without an immediate end in sight.”
Expectations for the US Federal Reserve (Fed) rate cuts have been reduced as oil-driven inflation complicates the US policy path. Traders await the release of the US February Consumer Price Index (CPI) inflation data for fresh impetus. Analysts expect inflation to remain relatively steady as traders weigh recent cooling trends against new geopolitical risks.
The headline CPI is estimated to show an increase of 2.4% YoY in February, while the core CPI is expected to show a rise of 2.5% during the same period. In case of softer-than-expected outcomes, this could drag the Greenback lower in the near term.
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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