EUR/USD loses ground as Middle East tensions lift US Dollar
EUR/USD edges lower to around 1.1580 in Tuesday’s early European session. Rising Middle East tensions boost the US Dollar, a safe-haven currency. Markets are now pricing in at least two rate hikes from the ECB in 2026.The EUR/USD pair loses momentum to near 1.1580 during the early European session on Tuesday. The Euro (EUR) weakens against the Greenback as escalating geopolitical tensions in the Middle East drive traders toward a safe-haven currency.
US President Donald Trump was offering Iran a five-day reprieve, pointing to new talks with Tehran he believed could broker a deal that would resolve the conflict, per Bloomberg. Nonetheless, Iranian officials denied any talks with the US following Trump's remarks.
"The key question is whether participants see this as a genuine extension that brings a deal closer, or simply a delay that prolongs uncertainty," said Chris Weston, head of research at Pepperstone.
The European Central Bank (ECB) decided to keep interest rates on hold at its latest monetary policy meeting on Thursday, saying the war in Iran has made the outlook “significantly more uncertain.” Goldman Sachs analysts said it expects the ECB to deliver two 25 basis point (bps) interest rate hikes in April and June, joining peers J.P.Morgan and Barclays.
The preliminary readings of the Purchasing Managers Index (PMI) for March from the US, Eurozone and Germany will be the highlights later on Tuesday. Traders await the Fedspeak later this week for more clues about the US interest rate outlook. Any hawkish comments from Federal Reserve (Fed) officials could lift the USD and act as a headwind for the major pair.
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%).
What is the ECB and how does it impact the Euro?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.
How does inflation data impact the value of the Euro?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.
How does economic data influence the value of the Euro?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.
How does the Trade Balance impact the Euro?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.