Euro flatlines above 1.1400 with geopolitical tensions, Oil prices capping rallies
- EUR/USD steadies just above 1.1400, halfway through last month's rally.
- Concerns about an all-out war in Iran and rising Oil prices pose a heavy weight for any significant Euro recovery.
- Hopes of a new ceasefire are keeping the Euro from depreciating further.
The Euro (EUR) trades practically flat, a few pips above 1.1400 against the US Dollar (USD) on Tuesday, halfway through the last four weeks horizontal range. A mild reversal on the US Dollar Index has provided some support. However, the uncertain situation in the Gulf and the recent rally in Oil prices remain a heavy weight for any significant Euro recovery.
US and Iran ramped up their hostilities over the weekend, heightening concerns that the conflict might escalate out of control, and keeping investors’ appetite for risk subdued. The Strait of Hormuz is practically closed, and the Iran-backed Houthis announced a blockade to Saudi Arabian vessels in the Red Sea, which is likely to boost concerns about a crude oil shortage,
Risk aversion, however, remains at moderate levels, as reports that mediators have delivered Iranian authorities a proposal for a 10-day ceasefire have provided a glimpse of hope.
In Europe, the ZEW Economic Sentiment Survey will provide some distraction on Tuesday, although investors' focus is on the European Central Bank’s (ECB) Monetary Policy decision on Thursday. The bank is widely expected to leave rates on hold, but traders are pricing another rate hike in September, and they will be eager to spot some signals in that direction at ECB President Christine Lagarde's press conference.
The US economic calendar is thin on Tuesday and during the rest of the week. The only event worth mentioning will be the preliminary S&P Global Manufacturing and Services Purchasing Managers' Index (PMI) figures, due on Friday.
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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