The EUR/USD pair recorded slight gains around 1.1635 during Tuesday’s Asian session. However, the potential benefits may be narrow as Iran has announced a halt to negotiations with the US and a complete closure of the Strait of Hormuz, which could create a risk-averse mood. The flash reading of the harmonized index of consumer prices (HICP) for the euro area will be published later on Tuesday.
According to CNBC, Iranian negotiators will stop exchanging messages with the United States (US) through intermediaries, and Iran will take steps to completely close the Strait of Hormuz in retaliation for continued ceasefire violations. US President Donald Trump said on Monday that he had called Israeli Prime Minister Benjamin Netanyahu and asked him not to launch a major raid on Beirut and that Israeli troops had been turned back.
Netanyahu, however, opposes Trump, emphasizing that he will continue to act against Hezbollah in southern Lebanon. Escalating conflicts in the Middle East could strengthen a safe-haven currency such as the US dollar (USD) and weigh on the major pair.
On the other hand, the hawkish stance of the European Central Bank (ECB) could provide some support for the common currency. ECB board member Isabel Schnabel said on Monday that the central bank can no longer ignore the inflationary effects of the conflict in Iran as price pressures spread beyond the energy sector and the risk of unanchored inflation expectations increases.
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 economic 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 indefinite members, including ECB President Christine Lagarde.
Inflation data in the euro area, measured by the Harmonized Index of Consumer Prices (HICP), is an crucial 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 common currency. A robust 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 faint, the euro will likely fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) is particularly crucial as they constitute 75% of the eurozone economy.
The next crucial 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.
