During Friday’s early Asian session, the EUR/USD pair remains stable around 1.1445. Traders continue to analyze developments surrounding conflicts in the Middle East. The Michigan Consumer Sentiment Index’s preliminary reading for July will be released later in the day on Friday.
Reuters reported on Thursday that Iran has asked Yemen’s Houthi militia to be ready to close the Red Sea oil route if the United States (US) attacks Iran’s energy infrastructure, posing a powerful up-to-date threat to global energy supplies.
Meanwhile, Tasnim news agency reported another explosion in Bandar Abbas, Qeshm and Ahvaz. Very thunderous explosions were heard in Kuwait, and the sound was also heard in Basra.
Earlier this week, US President Donald Trump threatened to hit Iran’s bridges and power plants next week if the country did not return to talks. Signs of escalating tensions in the Middle East could strengthen the position of a safe and sound haven currency such as the US dollar (USD) and cause adverse effects on the major currency pair in the near future.
On the other side of the ocean, the European Central Bank (ECB) is expected to keep interest rates on hold next Thursday, but will raise them for the second time this year in September, according to Reuters, as a renewed rise in energy prices increases the risk of intensifying inflationary pressures.
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 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. Silna gospodarka jest dobra dla 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 frail, 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.
