Euro holds gains above 1.1600 on ECB tightening prospects
- EUR/USD posts modest gains near 1.1625 in Tuesday’s early Asian session.
- The ECB is expected to raise interest rates again on Thursday.
- The US and Iran fired on each other’s ships, raising fears of wider war.
The EUR/USD pair trades with mild gains around 1.1625 during the early Asian session on Tuesday. The Euro (EUR) strengthens against the US Dollar (USD) amid expectations of a rate hike from the European Central Bank (ECB). Traders await the US Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data later this week.
The ECB delivered its first hike since 2023 in its June policy meeting to tame surging prices, but then hit pause at its last meeting in July to see how the conflict would develop. The ECB is set to hike its benchmark rate for the second time this year at its policy meeting on Thursday.
"The ECB governing council looks certain to raise its deposit rate from 2.25 percent to 2.5 percent," said Andrew Kenningham, chief Europe economist at Capital Economics.
ECB President Christine Lagarde is expected to give little away at her press conference after the rate call and insist that future decisions will be based on incoming data.
Across the pond, a stronger-than-expected US jobs report showed 162K job additions in August, pushing Federal Reserve (Fed) rate-hike bets above 60%.
Additionally, ongoing Middle East tensions, including tit-for-tat strikes between the US and Iran on vessels sailing in the Strait of Hormuz, could drive flows into safe-haven assets such as the Greenback.
Iranian Parliament Speaker Mohammad Baqer Qalibaf said on Monday that “Strike our assets and you get struck.” Earlier on Monday, US Defense Secretary Pete Hegseth stated that the US “will destroy (and sink)” Iranian oil tankers if Iran fires on U.S. vessels.
Euro focus turns to ECB as markets eye further tightening signals
Analysts at Deutsche Bank highlight that, in Europe, “the ECB policy decision (Thursday) will be the key event,” with their European economics team expecting “a 25bp rate increase, taking the deposit rate to 2.50%.” They add that investors are likely to concentrate on “any guidance regarding the likelihood of further tightening,” particularly in light of their recently upgraded Euro Area growth projections for 2026 and 2027 and the softer EUR/USD backdrop amid a stronger Dollar and higher US yields.
Technical Analysis: EUR/USD keeps a modest bullish bias above the 100-day SMA
In the daily chart, EUR/USD holds a modest bullish bias as spot remains above the Bollinger middle band, which coincides with the 20-day simple moving average (SMA) and comfortably over the 100-day moving average (MA). This configuration suggests the broader uptrend is still supported, while the Relative Strength Index (RSI) around 56 hints at constructive but not overextended bullish momentum.
On the topside, immediate resistance emerges at the Bollinger upper band near 1.1710, where a break would open the way for a stronger continuation of the advance. On the downside, initial support is provided by the 20-day SMA clustered around 1.1615, followed by the 100-day MA at 1.1560, while a deeper pullback would meet the lower Bollinger band near 1.1525.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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