EUR/USD edges lower below 1.1700 as Iran-UAE conflict boosts US Dollar

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EUR/USD softens to near 1.1690 in Tuesday’s early Asian session.
Iran launched missiles and drones at the UAE after several attacks on commercial ships.
ECB’s Nagel said central bank may need to hike rates in June.

The EUR/USD pair trades in the negative territory around 1.1690 during the early Asian session on Tuesday. The Euro (EUR) weakens against the US Dollar (USD) amid rising tensions in the Middle East after Iran attacked the United Arab Emirates (UAE). Traders will keep an eye on the US April ISM Services Purchasing Managers Index (PMI) report, which is due later on Tuesday.

CNBC reported on Monday that the UAE came under attack from Iranian drones and missiles, while the US said it sank Iranian boats in the Strait of Hormuz. US President Donald Trump warned Iran that it will be “blown off the face of the earth” if it targets US ships that are protecting commercial vessels transiting the strait. Fears of an exacerbated or prolonged war could boost a safe-haven currency such as the Greenback and create a headwind for the major pair.

Across the pond, hawkish remarks from the European Central Bank (ECB) policymakers might help limit the shared currency’s losses. Bundesbank President Joachim Nagel said on Monday that the ECB may need to raise interest rates in June if the inflation outlook does not improve significantly in the coming weeks.

The ECB kept rates ‌unchanged last week. According to the statement, the central bank said the inflation outlook was largely unchanged, adding that "the upside risks to inflation and the downside risks to growth have intensified.”

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.