Euro flatlines near 1.1450 amid renewed Hormuz hostilities

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The EUR/USD pair holds steady around 1.1445 during the early Asian session on Friday. Traders continue to digest the developments surrounding the Middle East conflicts. The preliminary reading of the Michigan Consumer Sentiment Index for July will be published later on Friday.

EUR/USD trades flat near 1.1445 in Friday’s early European session.
Iran told Houthis to close the Red Sea oil route if the US hits the power network.
Rising tensions in the Middle East have boosted crude oil prices, prompting markets to anticipate another ECB rate hike in September.

Reuters reported on Thursday that Iran has asked Yemen’s Houthi militia to stand ready to close the Red Sea oil route if the United States (US) strikes Iranian power infrastructure, posing a potent new threat to global energy supplies.

Meanwhile, the Tasnim news agency reported another explosion in Bandar Abbas, Qeshm, and Ahvaz. Very loud explosions were heard in Kuwait, and the sound was also heard in Basra.

Earlier this week, US President Donald Trump threatened to strike Iran's bridges and power plants next week if the country does not return to talks. Signs of escalating tensions in the Middle East could boost a safe-haven currency such as the US Dollar (USD) and create a headwind for the major pair in the near term.

Across the pond, the European Central Bank (ECB) is expected to hold interest rates next Thursday but will hike for the second time this year in September as a renewed energy price surge raises the risk of more intense inflation pressures, according to Reuters.

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.