Euro pares its gain by half amid US-Iran diplomacy

The Euro serves as the Eurozone’s currency

Used by the 20 European Union countries within the Eurozone, the Euro ranks second only to the US Dollar among the world’s most actively traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most actively traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

ECB policy influences the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) acts as the Eurozone’s reserve bank, setting interest rates and overseeing monetary policy. Maintaining price stability is the ECB’s main mandate, whether through controlling inflation or stimulating growth. Interest rate increases and cuts are its principal policy instruments. Higher rates relative to those elsewhere, or expectations that rates will rise, generally support the Euro; the reverse also applies. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national central banks and six permanent members, among them ECB President Christine Lagarde.

Inflation readings influence the Euro’s value

Measured by the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An increase above expectations, particularly beyond the ECB’s 2% target, obliges the central bank to raise interest rates to bring inflation under control. When interest rates are relatively high compared with those elsewhere, the Euro usually benefits: global investors find the region a more attractive place to hold their money.

Economic releases help determine the Euro’s direction

By providing a measure of economic health, data releases can affect the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators capable of moving the single currency. Economic strength supports the Euro by attracting additional foreign investment and potentially prompting the ECB to raise interest rates, which would directly strengthen the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular importance attaches to figures from Germany, France, Italy and Spain. Together, these four largest euro area economies represent 75% of the Eurozone’s economy.

The Trade Balance affects demand for the Euro

The Trade Balance is another important release for the Euro, showing the difference between a country’s export earnings and its spending on imports over a specified period. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting its value. A positive net Trade Balance therefore strengthens the currency, while a negative balance has the opposite effect.