Euro weakens amid US-Iran peace deal uncertainty
- EUR/USD softens to near 1.1635 in Tuesday’s early Asian session.
- US forces carried out defensive strikes in southern Iran on Monday.
- ECB rate hike chance rises as Iran conflict fuels inflation.
The EUR/USD pair trades in negative territory around 1.1635 during the early Asian session on Tuesday. The Euro (EUR) weakens against the US Dollar (USD) as uncertainty surrounding the US-Iran peace agreement boosts a safe-haven currency. The European Central Bank (ECB) policymaker Olaf Sleijpen and Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari are set to speak later on Tuesday.
Fox News reported that US forces conducted "self-defense strikes" in southern Iran on Monday. US Central Command spokesperson said that American strikes targeted missile launch sites and Iranian vessels aiming to deploy minessites and Iranian boats trying to place mines. The US military stated that it will protect forces while exercising restraint during the ceasefire.
Earlier Monday, US President Donald Trump said negotiations toward a deal with Iran to end their conflict and reopen the Strait of Hormuz were "proceeding nicely,” per Bloomberg. Traders will closely monitor developments surrounding the US-Iran peace deal. Any sign of escalation in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.
On the other hand, the hawkish stance of the ECB might help limit the shared currency’s losses. ECB Governing Council member Martin Kocher said on Sunday that the central bank is increasingly leaning toward an interest rate hike next month as the Iran conflict adds to inflation pressures. Financial markets are now pricing in nearly an 85% probability of a 25-basis-point hike from the ECB for the June meeting, according to the ECB Watch Tool.
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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