|

Euro consolidates below its highest level since June 17 as Mideast tensions support USD

  • EUR/USD consolidates below its highest level since June 17 amid a modest USD uptick.
  • The USD looks to build on its recovery from the post-NFP swing low amid Iran tensions.
  • Market attention now shifts to this week’s release of the latest US inflation figures.

The EUR/USD pair kicks off the new week on a subdued note and trades just above 1.1550 during the Asian session, well within striking distance of a fresh high since June 17, touched in reaction to the disappointing US jobs data on Friday.

The closely watched US Nonfarm Payrolls (NFP) showed that the economy lost 23K jobs in July, missing consensus estimates of 80K by a wide margin. Adding to this, the previous month's reading was revised lower to show an addition of 20K jobs, compared to the 57K reported originally. Further details revealed that annual wage inflation, as measured by the change in the Average Hourly Earnings, eased to 3.2% from 3.4%. This offsets a dip in the Unemployment Rate to 4.1%, from 4.2% in June, and undermines the case for the US Federal Reserve (Fed) to raise interest rates.

The immediate market reaction, however, turns out to be short-lived as persistent uncertainties over efforts to reopen the critical Strait of Hormuz lend some support to the safe-haven US Dollar (USD). The USD Index (DXY), which tracks the Greenback against a basket of currencies, is now looking to build on Friday's late rebound from its lowest level since June 17 and is turning out to be a key factor acting as a headwind for the EUR/USD pair. Traders, however, seem reluctant to place directional bets and opt to wait for further developments surrounding the Middle East crisis.

Over the weekend, Iran stated that talks with Oman to establish a safe shipping route through the strategic waterway are nearing an agreement. Tehran, however, cautioned that any deal would not result in an immediate reopening. Furthermore, Iran-backed Houthi militants in Yemen claimed a recent attack on Saudi Arabia’s Jazan refinery, while a tanker operated by the Abu Dhabi National Oil Co. came under attack in the Strait. This keeps the geopolitical risk premium in play and supports oil prices, fueling inflation fears and bets for at least one interest rate hike by the Fed in 2026.

The mixed fundamental backdrop, in turn, warrants some caution before positioning for an extension of the EUR/USD pair's recent strong move up from the vicinity of mid-1.1300s, touched on July 28. Market attention now shifts to the latest US consumer inflation figures, due on Wednesday, which will be looked for more cues about the Fed's policy path. Apart from this, the incoming geopolitical headlines will play a key role in influencing the USD price dynamics and producing some short-term trading opportunities around the EUR/USD pair.

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

Haresh Menghani

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

More from Haresh Menghani
Share:

Editor's Picks

AUD/USD hangs near three-week low, below 0.6950 as traders await US NFP report

AUD/USD hits a three-week low during the Asian session on Friday as the RBA’s dovish shift and a rout in equity markets weigh on the risk-sensitive Aussie. However, the recent slump in US bond yields to a two-month low keeps US Dollar bulls on the back foot and limits losses for the currency pair as traders look to the US NFP report for a fresh impetus.

USD/JPY bounces off three-week low; keeps the red near 157.65 as focus remains on US NFP

USD/JPY bounces off the weekly low set during the Asian session, as bears turn cautious ahead of the US NFP report due later this Friday. The upside seems limited as the recent slump in US bond yields and hopes of Iran war de-escalation undermine the US Dollar. Moreover, a hawkish BoJ and intervention risks support the Japanese Yen, capping the pair.

Gold loses the grip; $4,000 comes next on the downside

Gold sets aside two daily advances in a row on Friday, opening the door to a potential test of the key $4,000 mark per troy ounce. The precious metal’s retracement follows a decent improvement in the sentiment surrounding the US Dollar, solid NFP data and higher US Treasury yields across the board.

Democrats win House and Senate in US midterms: Why isn’t all bad news for crypto

The biggest story this week was Tuesday’s US midterm elections, which saw Democrats win control of both the House and the Senate in a clear blue wave. This political shift in the US has triggered sharp price swings across the cryptocurrency market.

Week ahead – Inflation and geopolitics in focus as US political landscape shifts

Post-midterm election euphoria fizzles out as risk aversion prevails. US CPI, PPI and Fedspeak on the radar as Fed hike bets remain supported. Oil retreat pauses on mixed hopes about the ongoing conflicts.

US Dollar breaks below 101.50 as Democrats sweep Congress
The US Dollar (USD) comes under heavy selling pressure on Wednesday, with the US Dollar Index (DXY) falling around 0.5% to trade near 101.35 after sliding below the 101.50 level. The Greenback retreats to its lowest level in four weeks as investors reassess the political and economic outlook following the Democratic Party's sweeping victory in the United States (US) midterm elections.