Euro declines to near 1.1400 as US launches fresh strikes on Iran
The EUR/USD pair posts modest losses around 1.1410 during the early Asian trading hours on Tuesday. Renewed tensions between the United States (US) and Iran continue to fuel risk-off sentiment, weighing on the Euro (EUR) against the US Dollar (USD). The ZEW surveys from Germany and the Eurozone are due later on Tuesday. Also, the US ADP employment report will be released.
The Guardian reported that the US has launched the 10th round of attacks against Iran on Tuesday. The US military said that it had struck “military command centres, air defence and coastal surveillance sites, maritime capabilities, missile and drone launch sites, and communications networks.”
Iran launched attacks against Bahrain and Kuwait, in addition to striking tankers in the Strait of Hormuz. Meanwhile, Yemen’s Iran-backed Houthi rebels announced a maritime embargo of Saudi Arabia. Escalating tensions and fears of wider conflicts in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair in the near term.
On the other hand, signs of cooling US inflation data might lower the possibility of a US rate hike later this year. This, in turn, could undermine the USD. Markets continue to expect no change to rates at the Fed’s next meeting on July 29, with Fed funds futures pricing an implied 84.5% chance of a hold, compared to a 61.5% odds a month ago, according to the CME FedWatch 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.
