Euro edges higher to near 1.1600 on US-Iran Strait of Hormuz deal

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The EUR/USD pair trades in positive territory around 1.1590 during the early Asian session on Tuesday. A deal to reopen the Strait of Hormuz spurred a rally in riskier assets such as the Euro (EUR) against the US Dollar (USD).

EUR/USD edges higher to near 1.1590 in Tuesday's early Asian session.
Trump and Vice President JD Vance signed an electronic copy of a memorandum of understanding with Iran.
Fed is set to hold its benchmark interest rate steady at its June policy meeting.

US President Donald Trump and Vice President JD Vance both virtually signed the agreement to end a US blockade of Iranian ports, reopen the Strait of Hormuz, and start 60 days of nuclear negotiations. The officials said that Parliament Speaker Mohammad Bagher Ghalibaf signed the document on behalf of the Iranian side. Hopes of a US-Iran peace agreement could provide some support to the shared currency in the near term.

Nonetheless, caution lingered as both sides offered differing accounts on key issues. Iran intends to collect certain “fees” in the critical waterway, while Trump said it would fully reopen on Friday without tolls. Trump said on Monday that if Iran failed to reach a final nuclear accord with the US, he would restart military attacks on Tehran.

The Fed is widely expected to keep its benchmark interest rate unchanged at a target range of 3.50% to 3.75% at its upcoming policy meeting on Wednesday. Traders will closely monitor the press conference and take more cues about how new Fed chair Kevin Warsh will lead the US central bank into its next era. Any hawkish remarks from Fed policymakers might help limit the Greenback’s losses and create 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.