Euro strengthens as ECB hikes interest rates for first time since 2023
- EUR/USD drifts higher to near 1.1575 in Friday’s early Asian session.
- The ECB announced a quarter-point rate hike on Thursday, bringing its deposit facility rate to 2.25%.
- Trump said he canceled planned military strikes against Iran.
The EUR/USD pair gathers strength to around 1.1575 during the early Asian trading hours on Friday. The Euro (EUR) edges higher against the US Dollar (USD) on the European Central Bank (ECB) interest rate hike and improved risk sentiment.
As widely expected, the ECB decided to raise the key interest rates for the first time since 2023 as Iran's war ramps up energy costs, lifting its deposit facility rate from 2.0% to 2.25% following its governing council meeting on Thursday. The ECB also hiked its main refinancing operations rate to 2.40% and its marginal lending facility rate to 2.65%.
“The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area,” said ECB President Christine Lagarde.
Signals of a US-Iran peace deal improved risk sentiment, supporting the shared currency. US President Donald Trump said that he had called off new military strikes on Iran on Thursday as negotiators are close to reaching an agreement on the final elements of a deal. Nonetheless, the uncertainty remains high, and any signs of rising tensions between the US and Iran could boost a safe-haven currency such as the Greenback and create a headwind for the major pair.
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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