Euro gathers strength to near 1.1550 ahead of ECB rate decision
- EUR/USD strengthens to around 1.1540 in Thursday’s early Asian session.
- The ECB is expected to hike interest rates on Thursday.
- US launches fresh strikes on Iran, raising fears of a prolonged Middle East war.
The EUR/USD pair trades in positive territory near 1.1540 during the early Asian trading hours on Thursday. Rising bets that the European Central Bank (ECB) will deliver a rate hike at its June policy meeting later on Thursday underpin the Euro (EUR) against the Greenback.
The ECB is anticipated to hike interest rates later in the day, as policymakers address the threat of second-round inflation effects amid elevated energy prices. This would be its first rate increase in three years.
Traders will closely monitor the ECB’s projections for inflation and economic growth. The market is pricing in three rate rises for the rest of the year. Also, ECB President Christine Lagarde's press conference could give hints as to whether the hike is a one-and-done rate adjustment or if more tightening is likely this year. Hawkish remarks from policymakers could lift the shared currency in the near term.
On the other hand, rising tensions in the Middle East could boost a safe-haven currency such as the US Dollar (USD) and act as a headwind for the major pair. US Central Command (CENTCOM) said the US began launching strikes in Iran on Wednesday, adding that the attacks are “in response to Iran’s unwarranted and continued aggression.”
Meanwhile, the Islamic Revolutionary Guard Corps (IRGC) stated that the Strait is "closed to all vessels, including oil tankers and commercial ships," effective immediately, and "any vessel attempting to transit the strait will be targeted."
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
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.
