Euro declines to near 1.1450 amid concerns over progress for US-Iran peace deal
- EUR/USD softens to around 1.1460 in Monday’s early Asian session.
- Trump threatened to restart the war with Iran on Sunday.
- ECB's Wunsch sees possible hike 'to be on safe side.’
The EUR/USD pair drifts lower to around 1.1460 during the early Asian session on Monday. Concerns about progress for the US-Iran peace deal and expectations of higher US interest rates boost a safe-haven currency such as the US Dollar (USD) against the Euro (EUR). European Central Bank (ECB) President Christine Lagarde is set to speak later on Monday.
CNBC reported on Sunday that US President Donald Trump threatened to restart war with Iran even as Vice President JD Vance met Iranian officials for the first talks under an interim peace deal that was overshadowed by Tehran's announcement it had again closed the Strait of Hormuz. Risk-off flows are back in play following the US-Iran headlines, supporting the Greenback.
“Iran must immediately stop their highly paid PROXIES in Lebanon from causing trouble,” said Trump in a post on Truth Social, apparently referring to Iran’s Hezbollah allies in Lebanon. “If they don’t, we’ll hit Iran very hard again, just like we did last week, only harder!!!”
European Central Bank (ECB) policymaker and the head of Belgium's central bank, Pierre Wunsch, said on Friday that the central bank may raise interest rates one more time as soon as next month if it sees more evidence of Eurozone inflation spreading beyond energy.
The ECB’s deposit rate currently stands at 2.25%, and financial markets expect additional 25 basis point hikes in September or October, possibly followed by one more in the early months of next year.
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.
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