The EUR/USD pair loses traction to around 1.1530 during the early Asian trading hours on Tuesday, pressured by uncertainty in the Middle East. Traders await the release of the US May Consumer Price Index (CPI) inflation data later on Wednesday for fresh impetus. On Thursday, the European Central Bank (ECB) interest rate decision will be in the spotlight.
Israeli Prime Minister Benjamin Netanyahu said on Monday that the war against Iran and its Lebanon-based proxy Hezbollah “has not yet ended,” though he insisted both are weaker than ever, per CNBC.
Earlier Monday, Iran had announced an end to its military operations against Israel. However, its central military command warned that if Israel continued to attack, including in southern Lebanon, “much harsher and more crushing actions than before will be on the way. Any signs of rising tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.
The European Central Bank (ECB) will hold its monetary policy meeting on Thursday. Markets have fully priced in a 25-basis-point (bps) rate hike after Eurozone inflation climbed to 3.2%.
“At its 11 June meeting, the ECB is very likely to raise its key interest rates by 25 basis points, in line with its recent hawkish communication,” said Martin Wolburg, senior economist at Generali Investments.
Traders will closely watch the ECB press conference for more hints about the interest rate outlook later this year. Any hawkish remarks from ECB policymakers could lift the shared currency in the near term.
Euro FAQs
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%).
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.
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.
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.
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.
