Euro trades flat as US midterms and US-Iran developments keep traders cautious
- EUR/USD holds steady as traders monitor US midterm elections and US-Iran developments.
- Oil price volatility keeps inflation and interest rate expectations in focus.
- France’s fiscal concerns add to the Euro’s headwinds as the ECB balances growth and inflation.
EUR/USD trades little changed on Tuesday amid a cautious market mood as traders watch the US midterm elections. US-Iran developments also remain in focus. At the time of writing, the pair trades around 1.1180, down 0.10% on the day after briefly climbing above 1.1200 on Monday.
Oil prices remain volatile as traders react to shifts in the news flow. Crude came under pressure following unconfirmed reports that Washington and Tehran have made concessions over Iran’s nuclear programme and frozen funds, before reversing course. Earlier, prices rose after the Wall Street Journal (WSJ) reported a US strike on Iran’s Qeshm Island.
Uncertainty surrounding the negotiations keeps a geopolitical risk premium in oil prices as traders weigh hopes of diplomatic progress against the risk of further military action. Elevated energy costs risk prolonging inflation and reinforce expectations that central banks may need to maintain tighter monetary policy for longer.
The Federal Reserve (Fed) raised interest rates by 25 basis points (bps) in September before pausing in October, reaffirming its commitment to restoring price stability. Traders price in a 75% chance of another increase in December, according to the CME FedWatch Tool.
This hawkish outlook supports the US Dollar, with stronger-than-expected labour data providing an additional boost. US JOLTS Job Openings rose to 7.523 million in September from 7.19 million, exceeding forecasts of 7.13 million. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, trades around 101.93.
For the energy-dependent Eurozone, persistently high energy costs raise the import bill and weigh on growth, while also posing upside risks to inflation. France’s fiscal concerns add another headwind for the Euro (EUR).
The European Central Bank (ECB) also held rates steady in October after delivering a total of 50 bps of increases earlier this year. For the energy-dependent Eurozone, persistently high energy costs raise the import bill and weigh on growth, while also posing upside risks to inflation. France’s fiscal concerns add another headwind for the Euro (EUR), further clouding the economic outlook and complicating the ECB’s policy decisions.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Author
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
