Half its gain erased: Euro pulls back on US-Iran diplomacy

1.1200 gives way as EUR/USD retreats from its highest level since 22 October.
Falling Crude Oil and Dollar leave the Euro outperforming the Pound.
3.9% forecast for October euro area inflation, due on Wednesday.

EUR/USD is back just below 1.1200. Roughly half the Euro's advance on Dollar weakness has been erased. From a session low just above 1.1150, the pair climbed to just below 1.1250, its strongest level since 22 October, before retreating. Having broken above Friday's high, it is now trading within Friday's range again.

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President Trump's signal that diplomacy with Iran would have more time sent Crude Oil lower. The Dollar also weakened, losing more against the Euro than against the Pound. Turner, ING's global head of markets, expects the Dollar Index to remain around 102.00. The Euro accounts for more than half of the index.

As Crude Oil prices declined during his remarks, European Central Bank (ECB) Governing Council member Escriva described the oil and gas price shock as larger than expected. Energy costs have yet to show signs of feeding into other prices, he said. Banque de France Governor Moulin characterised the effect on the broader economy as moderate. During their remarks, EUR/USD slipped below 1.1200.

3.9% inflation forecast leads the calendar

At 10:00 GMT on Wednesday, October euro area inflation is due, with a forecast of 3.9% versus the previous 3.8%. Core inflation is expected to remain at 2.5%. A speech by ECB President Lagarde follows at 16:00 GMT on Thursday. Both will inform the ECB's December decision on its 2.50% deposit rate, which represents the Euro side of the interest rate differential.

Wednesday's US Institute for Supply Management (ISM) services index is scheduled for 15:00 GMT. The forecast is 54.8, compared with 54.9 previously. At 13:30 GMT on Friday, the October Nonfarm Payrolls (NFP) report is due, with a forecast of 65K. Both releases will inform whether the Fed increases its 3.75%-4.00% rate following the hold on 28 October.

1.1100–1.1300 frames the trading range

Since early October, EUR/USD has ranged from just above 1.1100 to just below 1.1300. That followed a decline from just above 1.1700 in late August. The pair has remained below its 50-day Exponential Moving Average (EMA) since mid-September. That average sits just above 1.1300, while the 200-day EMA is just below 1.1500.

5-minute EUR/USD chart

Daily EUR/USD chart

Euro: frequently asked questions

Which countries use the Euro, and how widely is it traded?

20 European Union countries use the Euro as members of the Eurozone. Only the US Dollar ranks ahead of it in global currency trading. In 2022, the Euro featured in 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most traded currency pair. Next are EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The ECB: its role and influence on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank. Monetary policy management and interest rate setting fall within its remit. Maintaining price stability is the ECB's central mandate, whether through containing inflation or supporting growth. Interest rate increases and cuts are its main policy tools. Higher rates relative to other economies, or expectations of an increase, generally support the Euro; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone's national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation figures and their effect on the Euro

For the Euro, a key economic measure is Eurozone inflation as captured by the Harmonised Index of Consumer Prices (HICP). A stronger-than-expected rise in inflation, particularly above the ECB's 2% target, requires the central bank to increase interest rates to restore control over prices. When the region's interest rates exceed those of its counterparts, the Euro usually benefits. The higher rates make the region a more attractive destination for global investors' funds.

Economic indicators that shape the Euro's direction

Data on economic activity can move the Euro by signalling the economy's health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all affect the single currency's direction. Economic strength supports the Euro by attracting additional overseas investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic figures, by contrast, are likely to weigh on the Euro. Germany, France, Italy and Spain together represent 75% of the Eurozone economy. Releases from these four largest euro area economies therefore carry particular significance.

Trade Balance: a driver of Euro demand

The Trade Balance is another important release for the Euro. Over a specified period, it records the difference between a country's export earnings and its import spending. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers purchase those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.