EUR/USD inches higher after five days of losses, trading around 1.1480 during the Asian hours on Tuesday. Traders will likely observe the German Retail Sales and Unemployment data for February due later in the day, along with preliminary Eurozone Harmonized Index of Consumer Prices (HICP) figures for March.
Bank of France Governor François Villeroy de Galhau said on Monday that policymakers stand ready to act if energy-driven inflation broadens. He added that the Iran war-related energy shock is likely to be inflationary in the near term, though the European Central Bank cannot prevent the initial surge in prices.
The EUR/USD pair appreciates as the US Dollar (USD) declines after five consecutive days of gains. However, the Greenback may rebound amid rising safe-haven demand linked to uncertainty surrounding the Middle East tensions.
The Wall Street Journal (WSJ) reported that US President Donald Trump is open to ending the Iran war without reopening the Strait of Hormuz, signalling shifting priorities. However, continued US troop deployments point to mixed messaging and persistent risks to global energy flows.
Federal Reserve (Fed) Chair Jerome Powell noted on Monday that long-term US inflation expectations remain well anchored despite heightened Middle East uncertainties and emphasized that the Federal Reserve policy stance allows officials to evaluate the economic impact of the Iran conflict.
New York Fed President John Williams said that monetary policy is well-positioned for any unusual circumstances and told Reuters that the job market is still sending mixed signals on Monday.
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.
