EUR/USD extends recovery to near 1.1600 on Mideast ceasefire hopes

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The EUR/USD pair extends Tuesday’s recovery on Wednesday, trading 0.3% higher to near 1.1600 during the European session. The major currency pair gains as demand for safe-haven assets has diminished due to increased hopes of a ceasefire in the Middle East.

EUR/USD recovers further to near 1.1600 amid de-escalation in the Middle East war.
Iran is prepared to end the war but wants no guarantee of non-repetitive aggression.
Traders are expected to pare bets supporting ECB interest rate hikes this year.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.3% lower to near 99.50.

The expectation of a Mideast ceasefire intensifies, following comments from Iran’s President Masoud Pezeshkian, in a telephonic conversation with European Union (EU) Council President António Costa on Tuesday, that his country is ready to end the war with the US, but it needs a guarantee of no repetitive aggression.

Pezeshkian’s comments have resulted in a significant de-escalation in the Iran conflicts, as they are the first from Tehran emphasizing peace rather than extending military actions.

Meanwhile, a sharp decline in the oil price due to de-escalating Mideast conflicts has improved the appeal of the Euro (EUR), being a currency from the continent that relies heavily on oil imports to meet its energy needs.

Declining oil prices are also expected to force traders to pare bets supporting interest rate hikes by the European Central Bank (ECB) this year, which were increased significantly after the war started.

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.