US Dollar gains pressure Euro despite growing bets on US-Iran deal

US Dollar strength weighs on EUR/USD despite mounting speculation over a possible US-Iran agreement.
Lower crude oil prices and steadier markets may provide a base of support for the Euro.
French political turmoil and questions over ECB leadership weigh on the Euro.

EUR/USD trades near 1.1220 in Tuesday’s Asian session. The pair has edged down after a modest advance the previous day. Despite mounting speculation about a possible Washington-Tehran agreement, the US Dollar (USD) is strengthening. Traders are awaiting the forthcoming United States (US) Consumer Price Index (CPI) figures.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Optimism about diplomatic efforts to end the Middle East conflict has pushed crude oil prices to their lowest since August. Attacks in the region persist, but US President Donald Trump suggested additional strikes on Iran might be unnecessary while keeping the US "locked and loaded." Describing progress towards ending the war, Trump said Iran is "militarily, effectively over". He added that the current status quo is being preserved largely at neighbouring nations’ request.

Tuesday’s release of October US CPI figures is the key economic focus. Forecasts put annual headline inflation at 3.9%, up from 3.7%, and core inflation at 2.8%, compared with 2.6% previously. Last week’s Nonfarm Payrolls report reinforced expectations of a Federal Reserve interest rate increase at its December meeting. The CME FedWatch Tool now assigns an 82% probability, against 76% last Friday.

Fed officials’ latest remarks have had a hawkish bias. Inflation risks within the central bank’s mandate were emphasised by Richmond Fed President Thomas Barkin. Chicago Fed President Austan Goolsbee, meanwhile, noted that faster services inflation challenges the view that tariffs alone explain elevated prices.

Persistent political and fiscal instability in France is adding pressure on the Euro (EUR) and pulling EUR/USD lower. Uncertainty surrounding reports that ECB President Christine Lagarde could leave early is another headwind. Even so, cheaper oil and a recovery in market sentiment after last week’s turbulence could provide underlying support for the Euro ahead.

$3.2tn tech rout: Markets face US course-correction aftershocks

Global markets are trying to regain their footing, according to strategists at Societe Generale. Echoing historian Simon Schama in the Weekend FT, they characterise the backdrop as “the mother of all US course corrections.” In their assessment, the “$3.2tn Tech carnage” has shaken sentiment and “spooked investors to rush for the safety of government bonds, the Swissie and the dollar,” shaping trading as market participants review their appetite for risk and demand for safe havens.

Euro: Key questions answered

The Euro at a glance

20 European Union countries use the Euro as members of the Eurozone. Globally, only the US Dollar is traded more heavily. The Euro represented 31% of all foreign exchange transactions in 2022, with daily turnover averaging more than $2.2 trillion. The world’s busiest currency pair, EUR/USD, represents an estimated 30% of all transactions. Next are EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%.

The ECB’s role in driving the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and directing monetary policy. 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 instrument. Higher relative rates, or expectations of rate increases, generally support the Euro; lower rates have the opposite effect. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of Eurozone national banks and six permanent members, among them ECB President Christine Lagarde.

2% inflation target: Implications for the Euro

The Harmonised Index of Consumer Prices (HICP), which tracks Eurozone inflation, is a key economic measure for the Euro. An unexpectedly sharp rise in inflation, particularly beyond the ECB’s 2% target, requires the central bank to increase interest rates to regain control of price pressures. When the region’s interest rates are relatively high compared with those elsewhere, the Euro usually benefits. The higher returns make the region a more attractive destination for global investors’ funds.

Economic indicators and the Euro’s direction

The Euro can respond to data releases that signal the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys all have the potential to move the single currency. Economic strength supports the Euro by drawing in foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Germany, France, Italy and Spain together represent 75% of the Eurozone economy. Data from these four largest euro-area economies therefore carry particular weight.

Trade Balance: A source of Euro demand

The Trade Balance is another data release with significance for the Euro. Over a specified period, it compares a country’s export earnings with its spending on imports. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to pay for those goods, lifting the currency’s value. A positive net Trade Balance consequently supports a currency, while a negative balance has the reverse effect.