Euro flatlines above 1.1600 amid hawkish Fed stance, Iran deal uncertainty

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EUR/USD holds steady around 1.1625 in Thursday’s early Asian session.
Trump said talks with Iran are in the final stages, but warned of attacks if the deal fails.
The Fed has shifted to a hawkish tone, and more officials see a rate hike scenario.

The EUR/USD pair trades flat near 1.1625 during the early Asian session on Thursday. The potential upside for the major pair might be limited, as uncertainty surrounding US–Iran talks could boost the safe-haven assets. The preliminary readings of the Purchasing Managers' Index (PMI) for May from the Eurozone, Germany and the US are due later on Thursday.

US President Donald Trump said on Wednesday that negotiations with Iran were in the final stages, while warning of further attacks unless Iran agrees to a deal.

Meanwhile, Iranian President Masoud Pezeshkian stated that Tehran was not on the brink of giving in and threatened to retaliate for any strikes with attacks beyond the Middle East. Signs of escalating tensions between the US and Iran could boost a safe-haven currency such as the US Dollar (USD) and create a headwind for the major pair.

Additionally, a hawkish tone from the US Federal Reserve (Fed) could contribute to the USD’s upside. According to the April meeting minutes released on Wednesday, a majority of officials stated that interest rate hikes could become necessary if inflation remains persistently above the 2% target.

Across the pond, the majority of economists from the Reuters poll, around 85%, indicated that the European Central Bank (ECB) would raise its deposit rate by 25 bps to 2.25% in June, up from just over half expecting that before the April 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.