Euro declines below 1.1450 on US-Iran peace deal uncertainty

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EUR/USD posts modest losses near 1.1425 in Tuesday’s early European session.
Traders braced for the prospect of US rate hikes later this year.
Uncertainty surrounding the US-Iran peace deal weighs on the riskier currency, such as the Euro.

The EUR/USD pair trades with mild losses around 1.1425 during the early European session on Tuesday. The US Dollar (USD) edges higher against the Euro (EUR) amid risk-off sentiment and a hawkish Federal Reserve (Fed) stance. Traders will keep an eye on the preliminary readings of the Purchasing Managers Index (PMI) from Germany, the Eurozone and the United States (US) later on Tuesday.

Traders positioned for a more hawkish Fed under the leadership of new Chair Kevin Warsh. Last week, the US central bank decided to leave its benchmark interest rate unchanged between 3.50% and 3.75%. Warsh said during the press conference that “price stability” would be the Fed’s guiding principle.

Markets have priced in nearly an 89% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting, according to the CME FedWatch tool.

Meanwhile, uncertainty surrounding the US-Iran peace deal could boost the Greenback as a safe-haven currency. US Vice President JD Vance said on Monday that Iran agreed to admit nuclear monitors into the country after negotiations in Switzerland. However, Tehran denied making any new commitments.

Washington will mediate another round of talks beginning Tuesday to end clashes in southern Lebanon between Iran-backed Hezbollah and Israel, according to a US State Department official.

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.