Euro softens to near 1.1500 as US-Iran war widens
- EUR/USD weakens to around 1.1515 in Friday’s early Asian session.
- Tehran said the US would ‘pay the price’ for killing Iranian civilians.
- Fed held rates steady on Wednesday, but Warsh explicitly declined to give clues for future adjustments.
The EUR/ USD pair loses ground to near 1.1515 during the early Asian trading hours on Friday. The Euro (EUR) softens against the US Dollar (USD) amid risk-off sentiment and fears of wider war in the Middle East. The preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone for July and the Michigan Consumer Sentiment Index will be released later on Friday.
Iranian Parliament Speaker Mohammad Bagher Ghalibaf said on Thursday that the United States (US) will pay the price for killing Iranian civilians, per the Guardian.
Saudi Arabia and 13 other countries announced the creation of an international coalition to safeguard freedom of navigation through the Bab al-Mandeb Strait, the Red Sea and the Gulf of Aden. These developments raise concerns over prolonged conflicts in the region, which weigh on the shared currency as riskier assets.
The US Federal Reserve (Fed) held interest rates unchanged at its July policy meeting on Friday. Traders questioned whether the Fed's new chief was serious about containing inflation. This, in turn, might undermine the Greenback and create a tailwind for the major pair.
Markets are now pricing in nearly a 63.4% odds of a US rate hike in September, down from about 77% before the July Fed meeting, according to the CME FedWatch tool.
Euro gains edge as ECB clarity contrasts with US uncertainty
Strategists at DBS Bank argue that the Euro is drawing support from clearer policy guidance in Europe relative to the US. They note that “while Warsh leaves US markets stumbling in the dark, the European Central Bank was more unified in flagging a September rate hike,” a stance that, in their view, is “handing the EUR a distinct comparative advantage” over the Dollar.
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.
