EUR/USD edges lower below 1.1650 as Middle East tensions fuel US Dollar strength

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EUR/USD trades with mild losses near 1.1635 in Thursday’s early Asian session.
The escalation of the Middle East conflict boosts the US Dollar, a safe-haven currency.
ECB’s Kazaks said current rates are appropriate.

The EUR/USD pair trades in negative territory around 1.1635 during the early Asian session on Thursday. The US Dollar (USD) strengthens against the Euro (EUR) as escalating Middle East conflict boosts safe-haven flows. Traders brace for the Eurozone Retail Sales and US weekly Initial Jobless Claims reports, which will be released later on Thursday.

The conflict between the US, Israel, and Iran has entered its sixth day on Thursday. Israel's military said on Wednesday that it has begun a new wave of strikes targeting military infrastructure in Tehran, while the chairman of the Joint Chiefs of Staff stated the US will start “striking progressively deeper” into Iran.

Heightened geopolitical tensions triggered a "flight-to-safety" among traders, supporting the Greenback and creating a headwind for the major pair.

The European Central Bank (ECB) policymaker Martins Kazaks said on Tuesday that the ECB should "sit tight" and keep interest rates ‌steady for now as the impact of the war in Iran remains uncertain. Surging oil and gas prices due to Middle East conflicts have fueled fresh inflation fears, causing traders to place some bets on an ECB rate hike this year. This, in turn, could lift the shared currency against the USD.

Money markets are now pricing in nearly a 40% ‌probability of an ECB rate hike by year-end, with expectations rising after hotter-than-expected inflation data for February on Tuesday, according to Reuters.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.