Euro weakens to near 1.1400 as US-Iran escalation boosts US Dollar
- EUR/USD weakens to near 1.1400 in Monday’s early Asian session.
- The US military said it launched another round of strikes at Iran.
- The US June CPI inflation report will be in the spotlight on Tuesday.
The EUR/USD pair edges lower to around 1.1400 during the early Asian session on Monday, pressured by heightened geopolitical tensions in the Middle East. Federal Reserve (Fed) Bank Governor Christopher Waller and European Central Bank (ECB) policymaker Isabel Schnabel are set to speak later in the day.
The US military said that it launched another round of strikes at Iran over the weekend, per CNN. The Islamic Revolutionary Guard Corps (IRGC) then launched retaliatory drone and missile assaults on US allies across the Middle East, including Kuwait, Jordan and Qatar.
Iran’s Foreign Ministry on Sunday condemned US military attacks on Iran, accusing Washington of violating international law and warning neighboring countries not to assist any military action against the country. Another escalation in the diplomatic breakdown between the US and Iran could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.
Traders have ramped up their bets on ECB hikes again in recent days on signs that an agreement between Washington and Tehran to end the war is in jeopardy. The ECB raised the interest rates at the June policy meeting and markets expect it to do so twice more over the next year to contain the fallout from the Iran war on energy prices.
The US Consumer Price Index (CPI) inflation data will be published later on Tuesday. The headline CPI is expected to decline by 0.1% MoM in June, while the core CPI is projected to show a rise of 0.3% during the same period. Any signs of softening inflation in the US could reduce pressure on the Fed to hike interest rates, weighing on the USD.
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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