Euro declines as market caution lifts USD

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EUR/USD depreciates after two days of gains, trading around 1.1650 during the Asian hours on Monday.

EUR/USD falls as the US Dollar strengthens on traders assessing ongoing US-Iran peace negotiation developments.
Trump seeks altering proposal terms regarding the Strait of Hormuz and removing Iran's highly enriched uranium.
May inflation rose across southern Europe but slowed in Germany, remaining above 2% and supporting a June ECB rate hike.

EUR/USD depreciates after two days of gains, trading around 1.1650 during the Asian hours on Monday. The pair is currently losing ground as the US Dollar (USD) maintains its strength, driven by market participants closely assessing the highly fluid developments surrounding United States (US)-Iran peace negotiations.

Because the Greenback functions as a premier safe-haven asset, any signs of escalating geopolitical friction or a breakdown in Middle East diplomacy could trigger further safe-haven inflows. Consequently, this geopolitical uncertainty continues to create a persistent near-term headwind for the EUR/USD pair.

US President Donald Trump seeks to alter and reinforce several key terms of the proposal aimed at ending the US-Israel war on Iran. According to the BBC, these requested changes specifically target regulations surrounding the strategic Strait of Hormuz and the mandatory removal of highly enriched uranium.

On the diplomatic front, Iranian officials are projecting a mix of caution and firm resolve. Iranian Foreign Minister Abbas Araghchi confirmed on Sunday that dialogue and message exchanges with Washington remain ongoing. However, he dismissed current media commentary as mere speculation, emphasizing that it is impossible to evaluate the negotiations until a definitive, clear outcome is reached.

Meanwhile, Iran's parliament speaker and top negotiator, Mohammad Bagher Ghalibaf, established a strict boundary for the talks, asserting that Tehran will not accept any agreement with Washington unless it explicitly ensures that the rights of the Iranian people are secured.

Axios further reported that Trump wants to tighten multiple points of the deal he deems critical, particularly the handling and disposal of Iran’s nuclear material. A senior US official noted that Trump has been briefed that a formal response from Iran regarding these adjusted terms could take up to three days.

Flash May’s inflation rose in France, Italy, and Spain, but slowed in Germany. All exceeded the European Central Bank (ECB)'s 2% target. Recent ECB Meeting Minutes showed some members favored an April hike, backing expectations of a 25-basis-point increase on June 11.

Traders are shifting their immediate focus to the release of German Retail Sales data for April, which will offer a clearer snapshot of Eurozone consumer health and likely drive the EUR/USD pair's next short-term technical 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.