Euro weakens as US Dollar gains despite rising US-Iran deal bets
- EUR/USD falls as the US Dollar gains despite growing speculation of a potential US-Iran deal.
- Falling crude oil prices and stabilizing markets could offer underlying support for the Euro.
- The Euro faces headwinds from French political instability and uncertainty over ECB leadership.
EUR/USD inches lower after registering modest gains in the previous day, trading around 1.1220 during Asian hours on Tuesday. The US Dollar (USD) is gaining ground despite growing speculation of a potential deal between Washington and Tehran, while traders remain focused on the upcoming United States (US) Consumer Price Index (CPI) data.
Meanwhile, crude oil prices have fallen to their lowest levels since August amid optimism over diplomatic efforts to end the conflict in the Middle East. Although regional attacks continue, US President Donald Trump indicated that further strikes on Iran might not be necessary while keeping the US "locked and loaded." Trump noted positive momentum toward ending the war, stating that Iran is "militarily, effectively over" and that the current status quo is being maintained largely at the request of neighboring nations.
On the economic front, market attention centers on the release of October’s US CPI data on Tuesday. Headline CPI is expected to rise to 3.9% year-over-year from 3.7%, while core CPI is forecast to tick up to 2.8% from 2.6%. Following last week's Nonfarm Payrolls report, expectations for a Federal Reserve interest rate hike at the December meeting have strengthened, with the CME FedWatch Tool putting the odds at 82%, up from 76% last Friday.
Recent comments from Fed officials lean hawkish, as Richmond Fed President Thomas Barkin highlighted inflation risks within the central bank's mandate, and Chicago Fed President Austan Goolsbee pointed out that accelerating services inflation complicates the idea that high prices are driven solely by tariffs.
Meanwhile, the EUR/USD pair is losing ground as the Euro (EUR) faces headwinds from ongoing political and fiscal instability in France, as well as uncertainty regarding reports of ECB President Christine Lagarde's potential early departure. Nevertheless, lower oil prices and stabilizing market sentiment following last week's turbulence could offer the Euro some underlying support moving forward.
Markets brace for aftershocks of US course correction and tech rout
Strategists at Societe Generale suggest that global markets are now attempting to steady themselves after what they describe, echoing historian Simon Schama in the Weekend FT, as “the mother of all US course corrections.” They note that the “$3.2tn Tech carnage” has rattled sentiment and “spooked investors to rush for the safety of government bonds, the Swissie and the dollar,” setting the tone for trading as participants reassess risk appetite and safe-haven demand.
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.
