Euro holds steady near 1.1650 as Iran–US tensions counter hawkish ECB rate outlook

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The EUR/USD pair trades on a flat note near 1.1640 during the early Asian session on Wednesday. However, the potential upside for the major pair might be limited amid renewed tensions in the Middle East after Iran threatens to retaliate after US strikes on launch sites and boats.

EUR/USD flatlines around 1.1640 in Wednesday’s early Asian session.
Iran threatened retaliation after the US bombed missile sites and mine-laying boats.
ECB’s Villeroy said the central bank will do what is necessary to tame inflation.

Iranian Supreme Leader Mojtaba Khamenei said that Gulf powers will no longer be a shield for US bases and the US will no longer have a safe haven in the region, per the Guardian. Furthermore, Iran’s Revolutionary Guard Corps (IRGC) stated that it reserved the “legitimate and definite” right to retaliate against any ceasefire violations by the US.

The tensions between Washington and Tehran have renewed after US President Donald Trump said negotiations with Iran to extend their ceasefire and reopen the crucial waterway are proceeding. Uncertainty and signs of a prolonged conflict in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for the major pair.

On the other hand, hawkish comments from the European Central Bank (ECB) could underpin the shared currency. ECB policymaker Francois Villeroy de Galhau said on Tuesday that the central bank “will do what is necessary” to keep inflation on target. ECB board member Isabel Schnabel stated that the central bank should raise interest rates in June, even if ongoing peace talks with Iran yield a deal, as the conflict has been far longer than projected and high energy prices are spilling into the broader economy.

According to the ECB Watch Tool, financial markets are now pricing in nearly an 85% odds of a 25-basis-point hike from the ECB for the June meeting.

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.