Euro drifts below 1.1550 as hopes of a swift US-Iran peace deal wane
- EUR/USD drifts further from 1.1580 highs, reaching session lows below 1.1540.
- Waning hopes of a swift peace deal in Iran and higher Oil prices are hurting the Euro.
- FX volatility remains subdued, with traders awaiting July's US CPI release, due on Wednesday.
The Euro (EUR) nudges lower against the US Dollar (USD) on Tuesday, weighed by the stalemate in the US-Iran negotiations and higher oil prices, which put additional pressure on the crude-importing eurozone economies. The EUR/USD pair retreated to 1.1539 in the early European session, from seven-week highs at 1.1580.
Washington and Tehran are failing to find a formula to reopen the key Strait of Hormuz, amid reciprocal compensation claims for war damages, which pushes back hopes of a swift peace deal. Sea traffic through the waterway, meanwhile, remains reduced to a trickle, and Crude prices are bouncing higher, with the barrel of Brent Oil trading above $87, about 7% above last week’s closing price.
Hawkish Fedspeak gives a fresh boost to the USD
In the US, on Monday, Cleveland Federal Reserve (Fed) President Beth Hammack struck a hawkish note and provided some support to the US Dollar. Hammack affirmed that the current monetary policy "is not hurting the economy" and that she expects that it will take more than one interest rate hike to bring inflation back to target.
With markets practically evenly split about September's decision, investors are expecting Wednesday's US Consumer Price Index (CPI) figures to tip the scales. Headline inflation is expected to have eased to a 3.4% year-on-year rate in July, from 3.5% in June, with core CPI easing to a 2.5% yearly growth from 2.4% in the previous month.
UOB: EUR/USD faces higher hurdle for gains
Strategists at UOB Group note that the recent Euro rally is losing steam as key resistance levels cap further upside. The experts recall that the EUR tested the 1.1560 area three times but failed to break higher, suggesting that “upward momentum is starting to slow, and a break below 1.1495 (‘strong support’ level) would mean that EUR has likely entered a range-trading phase.”
UOB judges that “there has been no significant increase in upward momentum,” and that “the hurdle for further gains has risen, with EUR needing to close above 1.1580 before a move to 1.1600 and beyond can be expected.” In tandem, the bank has nudged its key downside marker higher, with “the ‘strong support’ level now at 1.1515 instead of 1.1495.”
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.
