EUR/USD ticks slightly lower after posting gains over the previous two sessions, hovering near 1.1530 during Asian trading hours on Wednesday. The pair shows limited movement as the US Dollar (USD) holds steady, with investors remaining cautious ahead of the Federal Reserve’s (Fed) policy decision scheduled for later in the day.
Markets widely anticipate that the Federal Reserve will keep its benchmark interest rate unchanged within the 3.50%–3.75% range for March, according to the CME FedWatch Tool. If the Fed opts to hold rates steady, it would mark the second consecutive pause, reflecting a cautious stance amid increasing economic and geopolitical uncertainty.
Traders are particularly focused on guidance from Fed Chair Jerome Powell regarding how the recent surge in oil prices may influence the central bank’s policy outlook. Crude oil prices have continued to climb against the backdrop of persistent Middle East tensions, while US allies have resisted President Donald Trump’s request to assist in securing shipping routes through the strategically vital Strait of Hormuz.
In a further escalation, the US military announced that it had targeted Iranian sites along the country’s coastline near the Strait of Hormuz, citing threats posed by Iranian anti-ship missiles to international shipping, according to Reuters. Separately, Israel stated that it had killed senior Iranian figures, including top security official Ali Larijani and Basij force chief Gholamreza Soleimani, in recent airstrikes, as reported by the BBC.
Rising energy prices are adding to global inflationary pressures, placing the European Central Bank (ECB) in a more challenging position. The ECB is set to announce its policy decision on Thursday and is also expected to keep its benchmark “Rate On Deposit Facility” unchanged at 2.0% in March.
Prior to the escalation in geopolitical tensions, markets had expected the ECB to remain on hold through 2026, supported by officials’ confidence that inflation was under control and policy settings were appropriate. However, the outlook has shifted notably, with traders now pricing in the possibility of a rate hike as early as July. ECB Governing Council member Peter Kazimir has also indicated that policymakers could consider raising rates sooner than previously anticipated.
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.
