EUR/USD continues to rise for the second day in a row, reaching a level of around 1.1560 on Wednesday during Asian hours. The pair is gaining in value as the US dollar (USD) weakens, driven by weakening demand for safe and sound markets amid easing tensions in the Middle East.
US President Donald Trump declared on Tuesday that the United States (US) will “exit soon” from the war in Iran, noting that the withdrawal could occur within two to three weeks. The comments confirm previous comments suggesting that the US strategic goals have been largely achieved, which raises expectations for a relatively quick resolution of the conflict.
Trump also emphasized that a formal agreement with Tehran is not a necessary condition for ending hostilities. Asked about the need for an agreement, he noted that Iran “does not have to reach an agreement,” emphasizing that it prefers to end the situation based on the results of military actions rather than diplomatic negotiations.
On the Iranian side, President Masoud Pezeshkian expressed his desire to de-escalate regional tensions if certain guarantees are met. Foreign Minister Abbas Araghchi, however, took a firmer stance, saying Tehran was not seeking a momentary ceasefire but rather a complete end to the war. He stressed the need for binding assurances against future aggression and reparations for damages, underscoring the continuing uncertainty regarding the resolution of the conflict.
The harmonized index of consumer prices (HICP) for the euro area increased by 2.5% year-on-year (y/y) in March, which was less than market expectations of 2.7%. Meanwhile, the core HICP, which excludes variable components such as food, energy, alcohol and tobacco, rose 2.3% y/y, slightly below forecasts and the previous reading of 2.4%.
Although both headline and core inflation data were below expectations, they still reflect continued price pressures in the euro area economy. Notably, the data suggests that the conflict in the Middle East has already had a significant inflationary impact on the bloc, particularly through increased energy costs.
European Central Bank (ECB) President Christine Lagarde and Chief Economist Philip Lane indicated that recent events may justify a more hawkish stance in monetary policy. However, they also noted that the scale and timing of any policy response would depend on the severity and durability of the energy shock resulting from the geopolitical situation.
Frequently asked questions about the euro
The euro is the currency of the 20 European Union countries belonging to the euro zone. It is the second most widely traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% discount on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The ECB’s primary task is to maintain price stability, which means controlling inflation or stimulating growth. Its basic tool is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the euro zone’s national banks and six constant members, including ECB President Christine Lagarde.
Inflation data in the euro area, measured by the Harmonized Index of Consumer Prices (HICP), is an vital econometric indicator for the euro. If inflation rises more than expected, especially above the ECB’s target of 2%, this obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to interest rates will typically benefit the euro as they make the region more attractive as a place to park money for global investors.
The published data are used to assess the condition of the economy and may affect the euro. Indicators such as GDP, PMIs for industry and services, employment and consumer sentiment surveys may influence the direction of the single currency. A sturdy economy is good for the euro. Not only will it attract more foreign investment, but it may prompt the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is tender, the euro will likely fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) is particularly vital as they constitute 75% of the eurozone economy.
The next vital data release for the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only appreciate in value due to the additional demand generated by foreign buyers wanting to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
