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Euro flat lines near mid-1.1500s vs USD as traders await US CPI amid Iran uncertainty

  • EUR/USD is seen consolidating in a narrow band as USD preserves modest recovery gains.
  • Mideast tensions lift oil prices, fueling inflation fears and Fed hike bets, supporting the USD.
  • Traders also seem hesitant and opt to wait for the release of the latest US inflation figures.

The EUR/USD pair struggles to gain any meaningful traction and holds steady around the 1.1545-1.1550 area during the Asian session on Tuesday. Traders seem hesitant to place aggressive bets and opt to wait for further developments surrounding the Middle East crisis and this week's release of the latest US inflation figures. Nevertheless, spot prices remain well within striking distance of the highest level since June 17, touched last Friday.

The disappointing US Nonfarm Payrolls (NFP) report forced investors to scale back their expectations for an immediate interest rate hike by the US Federal Reserve (Fed). This, in turn, fails to assist the US Dollar (USD) to capitalize on the previous day's modest gains and acts as a tailwind for the EUR/USD pair. Investors, however, are still pricing in the possibility that the US central bank will raise borrowing costs by the end of this year amid inflation risks stemming from volatility in oil prices due to the Iran war.

In the latest developments surrounding the Middle East crisis, Iran ruled out any future negotiations with Trump and said that it will wait until the US President’s term ends on January 20, 2029, to resume talks, dampening hopes for a swift reopening of the Strait of Hormuz. Moreover, traffic through the Bab el-Mandeb Strait remains choked due to the Iran-backed Houthis' naval blockade against Saudi Arabia. This remains supportive of the recent rise in crude oil prices to an over one-week high, fueling inflation fears.

Cleveland Fed President Beth Hammack said on Monday that the current rate is not meaningfully restricting the economy and that there is a need for some number of rate hikes. Hammack stressed that the longer the Fed waits, the longer it misses the 2% inflation goal. Hence, the focus will be on the US Consumer Price Index (CPI) and the Producer Price Index (PPI), due on Wednesday and Thursday, respectively. The data will provide more cues about the Fed's future policy path and influence the USD and the EUR/USD pair.

According to TD Securities, the recent inflation dynamics are likely to "keep the Fed looking to August inflation data ahead of the September meeting," reinforcing the central bank’s data-dependent stance. The bank also highlights that "PPI on Thursday will also be a key input into PCE estimates," underscoring the importance of upcoming producer price figures in shaping the broader inflation picture the Fed will assess.

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.

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Haresh Menghani

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

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