EUR/USD remains on the defensive below 1.1450 on Middle East tensions

EUR/USD holds gains near 1.1430 in Monday's early Asian session.
The US energy secretary said Iran war is expected to end within next few weeks.
Traders await the Fed and the ECB interest rate decisions later this week.

Lallalit Srijandorn FXStreet

The EUR/USD pair remains on the defensive around 1.1430 during the early Asian session on Monday. However, the potential upside for the major pair might be limited as escalating Middle East tensions could boost safe-haven flows.

US energy secretary Chris Wright said that he expects the US-Israel war with Iran to end within “the next few weeks,” with oil supplies rebounding and energy costs declining afterward, per the Guardian. Meanwhile, Israel’s military stated that it plans for its campaign to continue for at least three more weeks.

US forces targeted every military site on Kharg Island over the weekend, a critical Iranian oil export hub. While US President Donald Trump stated oil infrastructure was not hit, Iran has threatened to retaliate against any US-linked oil facilities in the region.

France’s President Emmanuel Macron said on Sunday that freedom of navigation through the Strait of Hormuz must be restored as soon as possible. Macron called on the Iranian president to put an immediate end to unacceptable attacks against countries in the region, including Lebanon and Iraq.

Any signs of rising geopolitical risks in the Middle East could boost safe-haven currencies such as the US Dollar (USD) and act as a headwind for the major pair in the near term.

The US Federal Reserve (Fed) and the European Central Bank (ECB) interest rate decisions will be in the spotlight later this week. The Fed is anticipated to maintain interest rates at their current target range of 3.5% to 3.75% at its upcoming policy meeting on Wednesday. Meanwhile, the ECB is widely expected to hold rates steady on Thursday.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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