Euro holds steady against US Dollar amid US debt strategy
- EUR/USD gains as the US Dollar declines on US Treasury bond buyback plans
- Escalating US-Iran geopolitical tensions could drive safe-haven demand, limiting further US Dollar losses.
- Above-target Eurozone inflation fuels expectations of further ECB rate hikes, underpinning Euro strength.
EUR/USD remains stronger for the fourth successive trading day, hovering around 1.1680 during the Asian hours on Monday. The currency pair holds its ground as the US Dollar (USD) struggles under pressure from newly announced United States (US) fiscal moves. The Treasury Department surprised financial markets by pledging to at least double its buybacks of longer-dated government debt in an attempt to rein in rising bond yields. Treasury Secretary Scott Bessent noted that buybacks could expand beyond $4 billion, a strategic effort aimed at signaling that elevated yields do not accurately align with underlying economic fundamentals.
Despite this pressure on the Greenback, further upside for EUR/USD may remain limited due to safe-haven demand supporting the US Dollar amid escalating geopolitical tensions in the Middle East. Tensions flared after Iranian Foreign Minister Abbas Araghchi dismissed upcoming US sanctions as an act of desperation that would fail to weaken Tehran. Adding to the friction, Iranian Security Chief Mohsen Rezaei warned of "earthquake-like" retaliation if US President Donald Trump takes further action, reinforcing risk-off sentiment in global markets.
On the European front, the Euro (EUR) is drawing baseline support from sticky inflation figures and persistent expectations of ECB monetary policy. Eurozone consumer inflation expectations over the next year ticked down slightly to 2.9% from 3% in June. However, because price growth remains well above the European Central Bank's 2% target, markets continue to price in the possibility of additional monetary tightening following June’s interest rate hike.
ECB seen preparing structural LTRO framework as excess liquidity wanes
Analysts at Rabobank expect the ECB to move gradually toward a new framework for structural Longer-term Refinancing Operations as excess liquidity declines. They note that “the ECB could start discussions about the design of structural LTROs towards the end of this year, but the launch date depends on banks’ demand for reserves.” In their view, “12 months is a plausible maturity for these operations,” with the central bank likely favouring a more market-driven approach. Rabobank adds that “the ECB may issue the LTROs by auction, instead of the fixed-rate, full-allotment procedure,” aligning the new tool more closely with standard refinancing operations while still supporting reserve demand.
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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