EUR/USD remains subdued near 1.1550 due to rising Israel-Iran tensions
- EUR/USD faces challenges due to escalating geopolitical tensions in the Middle East.
- Israel and Iran continue to attack each other, defying international appeals for diplomacy and de-escalation.
- US Fed is expected to maintain its policy rate steady within the 4.25%-4.50% range on Wednesday.
EUR/USD extends its losses for the second successive session, trading around 1.1540 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) gains ground amid rising safe-haven demand as geopolitical tensions escalate in the Middle East.
Israel started attacks on Iranian nuclear facilities and missile factories on Friday. Iran responded with an attack on Israel late Sunday, with an explosion seen in the coastal city of Haifa. Israel continued attacking on military targets in Iran, despite international calls for diplomacy and de-escalation, per CNN.
Moreover, Iranian media outlet Mehr News reported that Iran has started the fourth phase of operation against Israel on Sunday. Iranian officials underscored that they would “respond firmly to any adventurism” from Israel.
On Friday, the University of Michigan (UoM) showed that the Consumer Sentiment Index climbed to 60.5 in June from 52.2 prior. This reading came in above the market consensus of 53.5. The US Federal Reserve (Fed) is expected to keep its policy rate unchanged within the 4.25%–4.50% range in its upcoming decision on Wednesday. However, traders now expect a 25 basis point rate cut by September.
However, the downside of the EUR/USD pair could be restrained as the Euro (EUR) receives support from rising sentiment surrounding the European Central Bank (ECB) of pausing its easing cycle to assess the impact of new US tariffs.
Euro FAQs
The Euro is the currency for the 19 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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