Euro steadies as Trump threatens to resume Iran strikes

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EUR/USD moves little after posting modest losses in the previous day, hovering around 1.1600 during the Asian hours on Wednesday. The currency pair may experience further depreciation as the US Dollar (USD) gains ground due to increased risk aversion stemming from the Middle East conflict.

EUR/USD may depreciate as the safe-haven US Dollar gains ground amid escalating Middle East tensions.
President Trump threatened to resume attacks on Iran within days to force a deal ending the conflict.
The Euro may gain ground, supported by hawkish commentary from ECB policymakers.

US President Donald Trump recently threatened to resume attacks on Iran in two or three days as part of a push for a deal to end the war. This came after a brief pause in planned hostilities following a new proposal by Tehran to end the US-Israeli conflict, per Bloomberg. Meanwhile, an Iranian official stated that the US threat of a massive assault would be met resolutely, asserting that Iran is fully prepared to confront any military aggression.

On the monetary policy front, Federal Reserve Bank of Philadelphia President Anna Paulson noted that current policy is mildly restrictive, which is helping to keep inflation pressures in check while maintaining a stable labor market. Paulson indicated that the current policy rate is suitable for applying downward pressure on inflation, though an appropriate rate increase remains possible if economic growth exceeds potential or if new inflation threats arise.

Meanwhile, the Euro (EUR) may gain ground against the US Dollar, supported by hawkish commentary from European Central Bank (ECB) policymakers. ECB Governing Council member Martin Kocher warned that a June rate hike is unavoidable if the Hormuz Strait remains closed, noting that a prolonged conflict will push eurozone inflation materially higher. Bundesbank President Joachim Nagel echoed this sentiment, stating that the ECB is moving away from its baseline scenario and hinting that action may be required in June.

Reflecting these central bank signals, a significant majority of economists polled by Reuters, around 85%, now expect the ECB to raise its deposit rate by 25 basis points to 2.25% in June. This marks a sharp increase in expectations compared to just before the April meeting, when only a little over half of the polled economists anticipated such a move.

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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