The EUR/USD pair edges higher to around 1.1615 during the early European session on Wednesday. The improved risk sentiment provides some support to the Euro (EUR) against the Greenback. Traders will take more cues from the Federal Reserve’s (Fed) Chair Jerome Powell testifies later on Wednesday.
Israel and Iran signaled that the air war between them had ended, at least for now, after US President Donald Trump publicly scolded them for violating a ceasefire he announced. The de-escalation of tensions in the Middle East could underpin riskier assets like the shared currency in the near term.
Across the pond, Federal Reserve (Fed) Chair Jerome Powell said on Tuesday that the US central bank will continue to wait and see how the economy evolves before deciding whether to reduce its key interest rate. Meanwhile, Kansas City Fed President Jeff Schmid noted early Wednesday that the Fed has time to study tariff effects on inflation before any rate decision.
Less dovish tone from the Fed officials could lift the US dollar and cap the upside for the pair. Money markets have fully priced in two Fed reductions by the end of 2025, with a first move in September far more likely than next month, though expectation of a July reduction rises from last week.
The Euro is the currency for the 19 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.
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