Euro bulls remain on the sidelines as USD gains on US-Iran tensions and inflation fears

EUR/USD remains depressed for the third straight day as escalating US-Iran tensions lift the USD.
Rallying oil prices fuel inflation fears and bolster Fed hike bets, further benefiting the Greenback.
The market focus shifts to the highly anticipated ECB monetary policy meeting , due on Thursday.

Haresh Menghani FXStreet

The EUR/USD pair kicks off the new week on a softer note, though it lacks follow-through selling, warranting caution before positioning for an extension of the pullback from a nearly four-week high touched last Wednesday. Spot prices currently trade around the 1.1430 region, down for the third straight day, as the focus remains on the Middle East crisis.

The US military said that it carried out a ninth straight night of strikes against Iran aimed at degrading Iranian capabilities used to attack commercial vessels and civilian mariners transiting the Strait of Hormuz. Moreover, US allies in the region reported a new wave of attacks on Sunday, pointing to a further escalation of the conflict. This continues to prompt traders to price in the geopolitical risk premium, which underpins the US Dollar's (USD) safe-haven status and acts as a headwind for the EUR/USD pair.

Meanwhile, crude oil prices have jumped to a fresh high since June 12 as the closure of the critical Strait of Hormuz, alongside the US naval blockade of Iranian ports, fuels concerns about more supply disruptions in the Middle East. This sudden spike in oil prices stokes fears of a reacceleration in global inflation, which might force major central banks, including the US Federal Reserve (Fed), to adopt a more hawkish stance. This is seen as another factor supporting the Greenback and warrants caution for the EUR/USD bulls.

Moving ahead, traders this week will take cues from the European Central Bank (ECB) meeting on Thursday, which will play a key role in influencing the shared currency. Apart from this, fresh geopolitical developments might continue to infuse volatility in financial markets, which would drive the USD demand and provide some meaningful impetus to the EUR/USD pair. In the meantime, the aforementioned fundamental backdrop warrants some caution for bulls, and before positioning for any meaningful appreciation.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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