EUR/USD declines to near 1.550 amid Middle East crisis
- EUR/USD softens to near 1.1560 in Monday’s early Asian session.
- Iran said it will hit the region’s energy sites if the US, Israel target power plants.
- Traders expect the ECB to hike rates as early as April due to rising inflation risks from energy shocks.
The EUR/USD pair loses ground to around 1.1560 during the early Asian trading hours on Monday. The Euro (EUR) weakens against the US Dollar (USD) as heightened geopolitical tensions in the Middle East have spurred volatility and weighed on the riskier assets. The European Central Bank officials are set to speak later on Monday.
Traders turn risk-averse amid an escalation of the Middle East war. US President Donald Trump said on Saturday that they will “obliterate” Iran’s power plants, starting with the biggest one, if they refuse to open the Strait of Hormuz within 48 hours. Furthermore, US Treasury Secretary Scott Bessent said on Sunday that sometimes you have to escalate to de-escalate.
Iran warned it would hit energy sites in the Middle East after Trump threatened to attack the country’s power plants if Tehran does not open the strategic Strait of Hormuz.
The ECB decided to keep interest rates on hold at its latest monetary policy meeting on Thursday, saying the war in Iran has made the outlook “significantly more uncertain." Policymakers said the conflict had created “upside risks for inflation and downside risks for economic growth,” prompting traders to up bets on potential ECB rate hikes later this year.
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.