EUR/USD softens to near 1.1650 as Middle East tensions lift US Dollar

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The EUR/USD pair trades with mild losses around 1.1655 during the early Asian session on Thursday. The Euro (EUR) softens against the US Dollar (USD) amid uncertainty surrounding the two-week ceasefire between the United States (US) and Iran.

EUR/USD posts modest losses near 1.1655 in Thursday’s early Asian session.
Iranian officials said peace talks would be 'unreasonable' as Israel expands Lebanon strikes.
Traders ramp up ECB rate hike bets as oil prices surge.

Reuters reported on Thursday that sporadic fighting continued in the Middle East, including in Lebanon. Iran officials cast that as violating the terms of the less than day-old ceasefire, suggesting that it would be "unreasonable" to proceed with talks to forge a permanent peace ‌deal with the United States (US). Persistent tensions in the Middle East could provide some support to a safe-haven currency such as the Greenback.

The US Consumer Price Index (CPI) inflation report for March will be in the spotlight later on Friday. The headline CPI is expected to show a rise of 3.3% YoY in March, versus 2.4% prior, driven by the surge in oil prices due to the Middle East war. Any signs of hotter inflation in the US could lift the Greenback and create a headwind for the major pair in the near term.

Across the pond, the hawkish tone of the European Central Bank (ECB) could help limit the shared currency’s losses. ECB policymakers, including Pierre Wunsch and Dimitar Radev, said that an interest rate hike at the April meeting is a live possibility, though many officials view a June move as more likely.

Traders have ramped up bets, with markets now fully priced in two rate hikes and more than a 50% chance of a third move by December, according to Reuters. That's a stark turnaround from before the war, when the risk was a cut this year.

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.