The EUR/USD pair is trading with slight losses around 1.1655 during Thursday’s early Asian session. The euro (EUR) is weakening against the US dollar (USD) amid uncertainty surrounding the two-week ceasefire between the United States (US) and Iran.
On Thursday, Reuters reported that there was sporadic fighting in the Middle East, including Lebanon. Iranian officials called it a violation of the terms of the recent ceasefire, suggesting it would be “unwise” to continue talks to reach a lasting peace deal with the United States (US). Continued tensions in the Middle East could provide some support for a safe-haven currency like the dollar.
The US inflation report for March will take center stage later on Friday. The headline CPI is expected to enhance by 3.3% y/y in March compared to 2.4% earlier, driven by rising oil prices due to the war in the Middle East. Any signs of higher inflation in the US could push the dollar higher in the near future and have adverse effects on the major currency pair.
On the other side, the hawkish tone of the European Central Bank (ECB) may support limit the losses of the common currency. ECB policymakers including Pierre Wunsch and Dimitar Radev have said a rate hike at the April meeting is realistic, although many officials believe a June decision is more likely.
According to Reuters, investors increased the number of bets, and markets have already fully priced in two interest rate increases and a more than 50% chance of a third move by December. This is a marked change from the situation before the war, when the risk was reduced this year.
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 enduring 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 common currency. A forceful 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.
