EUR/USD weakens below 1.1700 as Middle East tensions drive US Dollar strength
- EUR/USD softens to near 1.1685 in Tuesday’s early Asian session.
- The US urged Americans to depart immediately from countries throughout the Middle East due to rising tensions.
- The ECB might lean towards raising rates following a spike in oil prices due to military actions in the Middle East.
The EUR/USD pair trades with mild losses around 1.1685, the lowest since late January, during the early Asian session on Tuesday. The US Dollar (USD) gathers strength against the Euro (EUR) as escalating tensions in the Middle East boost safe-haven currencies. The preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone will be published later on Tuesday.
The United States (US) and Israel hit thousands of targets inside Iran, continuing their joint campaign after they killed its supreme leader, Ayatollah Ali Khamenei. US Secretary of State Marco Rubio said on Tuesday that the US is preparing for a “major uptick” in attacks in Iran over the next 24 hours.
Meanwhile, a commander in Iran’s Revolutionary Guard Corps (IRGC) stated that the Strait of Hormuz is closed and Iran will fire on any ship trying to pass. A sharp escalation in Middle East geopolitical tensions drives a flight to safety into the Greenback and creates a headwind for the major pair in the near term.
Analysts expect the European Central Bank (ECB) to keep rates steady through at least mid-2026. Nonetheless, a spike in oil prices has led some policymakers to suggest the central bank should be prepared to move rates in either direction if economic uncertainty persists.
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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