Euro gains ground to near 1.1550 on ECB rate hike bets

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The EUR/USD pair gathers strength near 1.1545 during the early European trading hours on Tuesday, bolstered by the hawkish stance of the European Central Bank (ECB). Traders brace for the US Consumer Price Index (CPI) data on Wednesday.

EUR/USD gains ground to around 1.1545 in Tuesday’s early European session.
The ECB is widely expected to raise its key interest rates at its June policy meeting on Thursday.
Trump said he might have a proposal for the Iran agreement within days.

The ECB is set to raise its key interest rate for the first time in almost three years at the upcoming June policy meeting on Thursday, becoming the first of its peers to tighten policy in response to a jump in energy prices caused by the conflict in the Middle East.

“At its 11 June meeting, the ECB is very likely to raise its key interest rates by 25 basis points, in line with its recent hawkish communication,” said Martin Wolburg, senior economist at Generali Investments.

ECB President Christine Lagarde will hold the press conference to deliver the monetary policy statement and take questions from journalists. Any hawkish comments from ECB policymakers could provide some support to the Euro (EUR) against the Greenback in the near term.

US President Donald Trump said on Tuesday that he might have a proposal for the Iran agreement within days, per Reuters. However, the uncertainty surrounding the Middle East remains high. Earlier Monday, Israeli Prime Minister Benjamin Netanyahu said that the war against Iran and its Lebanon-based proxy Hezbollah “has not yet ended,” though he insisted both are weaker than ever. Signs of rising tensions in the Middle East could boost the US Dollar (USD) as a safe-haven currency and act as a headwind for the major pair.

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.

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