Euro edges higher above 1.1500 on ECB hike bets, traders eye on Middle East tensions
- EUR/USD edges higher to near 1.1535 in Monday’s early Asian session.
- Trump said he will tell Netanyahu not to strike back at Iran.
- ECB is expected to raise interest rates amid the impact of the Iran war.
The EUR/USD pair gains momentum to around 1.1535 during the early Asian trading hours on Monday. Nonetheless, persistent geopolitical tension might cap the upside for the Euro (EUR) against the US dollar (USD). Germany’s Factory Orders and Eurozone Sentix Investor Confidence reports are due later on Monday.
US President Donald Trump said on Sunday that Israel should not retaliate against Iran following its missile barrage, arguing that further action would "blow up" a deal between the three sides. "We don't need another one," Trump told Axios after the Iranian attack before saying he planned to call Israeli Prime Minister Benjamin Netanyahu.
Iranian officials stated it would launch further attacks if Israel continues its offensive in Lebanon, where a deadly Israeli strike hit Beirut on Sunday amid fighting with Iran-backed Hezbollah. Any signs of escalating tensions in the Middle East could boost the Greenback as a safe-haven currency and act as a headwind for the major pair.
Across the pond, the hawkish stance of the European Central Bank (ECB) could provide some support to the shared currency. The European Central Bank (ECB) is likely to raise its deposit rate to 2.25% at its upcoming June policy meeting, with another increase likely in September, a Reuters poll of economists showed.
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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