Euro edges lower below 1.1550 as US launches self-defense strikes against Iran
- EUR/USD softens to around 1.1540 in Wednesday’s early Asian session.
- The US launched strikes on Iran to retaliate for the downed helicopter.
- ECB is widely expected to raise interest rates at its monetary policy meeting on Thursday.
The EUR/USD pair loses momentum to near 1.1540 during the early Asian session on Wednesday. Renewed tensions in the Middle East following the US attack on Iran drag the Euro (EUR) lower against the US Dollar (USD). Traders brace for the US May Consumer Price Index (CPI) inflation data, which is due later on Wednesday.
US officials said early Wednesday that the second round of strikes in Iran is taking place now, targeting air defense and radar systems, per Axios. This action came as Washington launched retaliatory strikes against Iran on Tuesday in what it called a proportional response to the shooting down of a US helicopter gunship near the Strait of Hormuz a day earlier.
Signs of rising tensions between the US and Iran could boost the Greenback as a safe-haven asset and create a headwind for the major pair in the near term.
However, expectations that the European Central Bank (ECB) would raise rates at its June policy meeting on Thursday might help limit the shared currency’s losses. “At its 11 June meeting, the ECB is very likely to raise its key interest rates by 25 basis points, in line with its recent hawkish communication,” said Martin Wolburg, senior economist at Generali Investments.
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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