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EUR/USD slips below 1.1600 as Middle East tensions escalate

  • EUR/USD weakens after fresh Israeli strikes hit Tehran.
  • President Trump announced a five-day truce following productive talks with Iran.
  • Iran’s Foreign Minister Abbas Araghchi denied any direct talks with Washington.

EUR/USD loses ground after registering modest gains in the previous session, trading around 1.1590 during the Asian hours on Tuesday. The pair depreciates as the US Dollar (USD) gains on increased risk aversion amid escalating Middle East conflict.

The Guardian reported on Tuesday that the Israeli military noted that it had launched a fresh wave of strikes on Tehran. This action came after US President Donald Trump signalled a pause in US attacks against energy infrastructure after what he said were productive talks with Iran. The Israeli Defense Forces (IDF) stated that it would continue operations in line with Israeli government directives until told otherwise.

Iran’s Foreign Minister, Abbas Araghchi, stated that there was “no dialogue” between Tehran and Washington. Meanwhile, Iranian Parliament Speaker Mohammad Bagher Ghalibaf said in a social media post on Monday that “no negotiations have been held with the US.” Mohsen Rezaei, the senior military adviser to Iranian Supreme Leader Mojtaba Khamenei, said that the war will continue until Iran receives full compensation for the damage it has sustained.

Reuters reported on Monday that San Francisco Federal Reserve Bank President Mary Daly said that unless the Iran conflict resolves quickly and the central bank can simply "look through" a temporary increase in oil prices, it is not clear what the next move on interest rates will need to be.

Rising oil prices are fueling inflation concerns and strengthening the European Central Bank’s (ECB) hawkish stance. The ECB left rates unchanged at last week’s meeting, citing the Iran conflict as a source of “significantly more uncertain” outlook.

Officials pointed to increasing inflation risks alongside weaker growth prospects, leading markets to boost expectations of potential rate hikes later this year. Policymakers are scheduled to speak on Monday, and any hawkish signals could provide support to the Euro.

Euro FAQs

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%).

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.

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.

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.

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

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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