EUR/USD edges higher as easing US-Iran tensions outweigh support from strong US data
- EUR/USD edges higher on Wednesday as easing US-Iran tensions improve risk appetite.
- US Dollar Index retreats toward 99.40 after hitting ten-month highs earlier in the week.
- Stronger US data, including ISM PMI, ADP jobs, and Retail Sales, but fails to lift the Greenback.
EUR/USD extends its advance for a second consecutive day on Wednesday, climbing to one-week highs as improving optimism around the US-Iran war lifts risk sentiment, pushing the Euro (EUR) higher and weighing on the US Dollar (USD).
At the time of writing, the pair is trading around 1.1611, up about 0.50% on the day after touching a high of 1.1623. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is hovering near 99.45 after touching ten-month highs of 100.64 earlier this week.
The move comes as markets react to growing expectations that the conflict in the Middle East could wind down following recent comments from both US and Iranian leaders.
US President Donald Trump, speaking from the Oval Office, told reporters that the United States “will be leaving Iran very soon,” adding that military action could end within “two or three weeks.” His remarks came after Iranian President Masoud Pezeshkian said on Tuesday that Iran has the “necessary will” to end the conflict, but is seeking guarantees to ensure it does not happen again.
However, uncertainty remains elevated. Donald Trump also said in a post on Truth Social that Iran’s leadership had requested a ceasefire, adding that Washington would consider it only if the Strait of Hormuz is “open, free and clear.” He warned that until then, the US would continue military operations.
On the data front, traders showed a muted reaction to the latest US economic releases. The ISM Manufacturing PMI rose to 52.7 in March, beating expectations of 52.5 and improving slightly from the previous 52.4.
The ADP Employment Change rose by 62K in March, beating expectations of 40K but easing from the previous reading of 66K (revised from 63K). Meanwhile, Retail Sales increased by 0.6% in February, surpassing forecasts of 0.5% and rebounding from a revised -0.1% decline in January (previously -0.2%).
Traders also digested fresh remarks from Federal Reserve and European Central Bank officials. St. Louis Federal Reserve (Fed) President Alberto Musalem said US monetary policy is “currently at the low end of the neutral range” and is “well positioned,” adding that it should likely be held in place “for some time.” He noted that war-related shocks have “increased risks to the economy and inflation” and said he can see scenarios to both “raise and cut interest rates.”
ECB policymaker Gabriel Makhlouf said the central bank is “ready to act when data clarifies the effects of the war,” warning that a prolonged conflict “would bring the ECB’s adverse scenario closer.” He added that policymakers are “not ruling anything in or out.”
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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