Euro gains traction above 1.1600 ahead of Eurozone HICP inflation release

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EUR/USD gains ground around 1.1635 in Tuesday’s early European session.
ECB's policymaker said Iran war inflation too broad to look through, flags rate hikes.
Iran suspended talks with the US over Israeli attacks in Lebanon.

The EUR/USD pair holds positive ground near 1.1635 during the early European trading hours on Tuesday. Hawkish stance of the European Central Bank (ECB) provides some support to the Euro (EUR) against the US Dollar (USD). Traders brace for the preliminary reading of Harmonized Index of Consumer Prices (HICP) from the Eurozone, which is due later on Tuesday.

ECB executive board member Isabel Schnabel on Monday signalled rate hikes, saying that the central bank can no longer overlook the inflationary impact of the Iran conflict as price pressures have spread beyond the energy sector and the risk of unanchored inflation expectations has risen.

The Eurozone HICP inflation report could offer some clues about the ECB interest rate outlook. Headline inflation is expected to tick up to 3.2% YoY in May from 3.0% in April. Any signs of hotter inflation in the Eurozone could lift the shared currency in the near term.

On the other hand, broader geopolitical uncertainties might keep traders on edge and underpin a safe-haven currency such as the Greenback. Iran’s state media said Tehran on Monday had suspended talks over Israel’s actions in Lebanon. Separately, US President Donald Trump stated that he believes an agreement to reopen the Strait of Hormuz and extend the ceasefire with Iran is reachable “over the next week.”

ECB FAQs

What is the ECB and how does it influence 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 for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.