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Euro remains stuck near 1.1400 amid rising tensions in Iran, higher Oil prices

  • EUR/USD remains stuck near five-week lows, with upside attempts capped below 1.1420.
  • Rising tensions in Iran and a more than 25% rally in Oil prices are boosting demand for the safe-haven USD.
  • Analysts at ING see market hopes of further ECB tightening as the main support for the Euro.

The Euro’s (EUR) modest upside attempt against the US Dollar (USD) witnessed during Wednesday’s Asian session has been short-lived. The EUR/USD pair was capped below 1.1420, before pulling back to levels a few pips above 1.1400 during the European trading session.

The risk-off market mood is keeping the common currency stuck near five-week highs, as hostilities continue in Iran, clouding hopes of a negotiated outcome. US hit Iranian targets for the 11th consecutive day, and US President Donald Trump threatened to attack Picaxe Mountain, which is believed to hide nuclear facilities.

Tehran warned that an attack would extend the war through the region, while, in the Red Sea, three Saudi Oil tankers turned around following Houthis’ announcement of a blockade in the Bab el-Mandeb Strait. This news contributed to pushing Crude prices higher, increasing pressure on the Euro, as the Eurozone economy is strongly sensitive to energy prices.

ECB tightening expectations are keeping the Euro from depreciating further

Meanwhile, investors brace for the European Central Bank’s monetary policy meeting, due on Thursday. Analysts at ING highlight that EUR/USD has "been performing relatively well despite the rebound in energy prices." They affirm that "interest rate differentials have probably had a say here, with higher oil prices seeing investors price a more aggressive tightening response from the European Central Bank than the Federal Reserve."

ING analysts, however, observe that "it is hard to see the market pricing in even higher ECB rates, regardless of the language delivered at tomorrow's ECB meeting and press conference," suggesting that the ECB support might soon wear out.

The US Dollar, on the other hand is showing a solid footing as investors' demand for safe assets offsets the doubts about the Federal Reserve (Fed) near-term monetary policy. US inflation figures released last week eased pressure on the central bank to hike interest rates at July’s meeting, which dented the US Dollar’s recovery.

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.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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