Euro gains ground above 1.1400 on hawkish ECB tone
- EUR/USD strengthens to around 1.1410 in Wednesday’s early European session.
- The ECB is widely expected to keep its deposit rate on hold at 2.25% on Thursday.
- US renewed strikes on Iran as Trump threatened to attack an underground nuclear site.
The EUR/USD pair holds positive ground near 1.1410 during the early European trading hours on Wednesday, bolstered by a hawkish tone from the European Central Bank (ECB). However, the potential upside for the major pair might be limited amid escalating military tensions and recent retaliatory airstrikes between the US and Iran.
The looming threat of persistent inflation has prompted traders to price in a more hawkish path for ECB monetary policy. This, in turn, could lift the shared currency in the near term. The ECB raised its key interest rates to 2.25% at its June policy meeting. Traders expect the ECB to hold its deposit rate steady at 2.25% at its upcoming July policy meeting on Thursday.
However, money markets indicated the ECB deposit rate at 2.66% in December and 2.73% in February 2027, up from the current 2.25%. They also fully priced the interest rate increase in September, according to Reuters.
On the other hand, ongoing tensions in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for EUR/USD. BBC reported that the US launched strikes on Iran for the 11th consecutive day on Tuesday, as Tehran warned the US against targeting its nuclear facilities. Iran's top joint military command said that Tehran will expand its strikes and target the US and its allies' interests across the region if the US attacks Iran's nuclear sites.
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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