Euro weakens below 1.1400 as Fed hike bets lift US Dollar

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The EUR/USD pair trades on a negative note near 1.1380 during the early Asian trading hours on Wednesday. The major pair extends the decline as traders continue to assess the developments surrounding the US-Iran peace deal.

EUR/USD declines to around 1.1380 in Wednesday’s early Asian session.
Trump insisted Iran agreed to more UN nuclear inspections
Expectations of US rate hikes could support the US Dollar.

US President Donald Trump said on Tuesday that Iran had "fully and completely" agreed to allow nuclear inspections, but Iran’s Foreign Minister Abbas Araghchi said earlier that real negotiations on the "nuclear issue" haven't started yet. Iran's chief negotiator stated on Tuesday that the Strait of Hormuz will "never return to its pre-war conditions" and that Iran will maintain control of the vital waterway.

A fresh round of talks between Israel and Lebanon began in Washington, DC, on Tuesday, in an effort to end fighting in Lebanon between Iran-backed Hezbollah and Israel. Any signs of a prolonged conflict in the Middle East or a lack of progress in the US-Iran peace agreement could weigh on the riskier assets, such as the Euro (EUR) against the US Dollar (USD) in the near term.

An unexpectedly hawkish Fed meeting chaired by Kevin Warsh last week boosted expectations for a year-end interest rate hike, supporting the Greenback. Traders are now pricing in nearly a 37.4% chance of at least 25 basis points (bps) at its July meeting, up from 8.5% a week ago, according to the CME FedWatch tool.

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.