Euro declines below 1.1650 as US-Iran tensions boost US Dollar

EUR/USD drifts lower to near 1.1630 in Tuesday’s early European session.
Optimism over an imminent US-Iran peace deal was tempered by new US strikes on southern Iran.
The hawkish stance of the ECB might help limit the Euro’s losses.

Lallalit Srijandorn FXStreet

The EUR/USD pair declines to around 1.1630 during the early European session on Tuesday. The US dollar (USD) strengthens against the Euro (EUR) as new US strikes dampen peace deal optimism and boost safe-haven flows.

The US military’s Central Command said US forces have carried out strikes on southern Iran in “self-defence,” the Guardian reported on Monday. It said that the military will defend US forces “while using restraint” during the ongoing ceasefire.

US Secretary of State Marco Rubio said on Tuesday that the Strait of Hormuz has to be open “one way or the other," per the Guardian. Rubio further stated that negotiating deal language with Iran may take a few days.

Traders will closely monitor the developments surrounding US-Iran peace negotiations. Any signs of rising tensions in the Middle East could underpin the Greenback in the near term.

Across the pond, the European Central Bank (ECB) rate hike odds rise as the Iran conflict fuels inflation. ECB policymaker Martin Kocher said on Sunday that the central bank is increasingly leaning toward an interest rate hike next month as the Iran conflict adds to inflation pressures. Financial markets are now pricing in nearly an 85%chance of a 25-basis-point hike from the ECB for the June meeting, according to the ECB Watch Tool.

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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