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Why Has the Euro Surrendered Half Its Gain on US-Iran Diplomacy?
- EUR/USD slips below 1.1200 after touching its strongest level since 22 October.
- With Crude Oil and the Dollar retreating, the Euro outperforms the Pound.
- Wednesday's October euro area inflation release is expected to show a 3.9% reading.
The Euro has surrendered roughly half its gains against a weaker Dollar. After advancing from a session low just above 1.1150 to just below 1.1250, the strongest level since 22 October, EUR/USD retreated to just below 1.1200. The advance took the pair past Friday's high, but it is now trading within Friday's range again.
The Euro gained more than the Pound against the Dollar as the US currency tracked a decline in Crude Oil. Oil prices dropped after President Trump indicated that diplomacy with Iran would be given more time. Turner, ING's global head of markets, expects the Dollar Index to continue trading around 102.00; the Euro accounts for more than half of the index.
As Crude Oil prices declined, European Central Bank (ECB) Governing Council member Escriva said the shock from oil and gas prices had exceeded expectations. He added that there was no evidence yet of energy costs feeding into other prices. Banque de France Governor Moulin, meanwhile, described the effect on the broader economy as moderate. During their remarks, EUR/USD slipped back below 1.1200.
Which upcoming releases could shape rate decisions?
Wednesday at 10:00 GMT brings October's euro area inflation release, with a forecast of 3.9% compared with the previous 3.8%. Core inflation is expected to remain at 2.5%. A speech by ECB President Lagarde follows on Thursday at 16:00 GMT. Both will inform the ECB's December decision on its 2.50% deposit rate, which represents the Euro side of the interest-rate differential.
For the US, Wednesday's Institute for Supply Management (ISM) services index is scheduled for 15:00 GMT, with a reading of 54.8 expected against 54.9 previously. Friday then brings the October Nonfarm Payrolls (NFP) report at 13:30 GMT, for which the forecast stands at 65K. Both releases will inform whether the Fed increases its 3.75%-4.00% rate following the hold on 28 October.
What does the EUR/USD chart show?
Following a decline from just above 1.1700 in late August, EUR/USD has remained in a range from just above 1.1100 to below 1.1300 since early October. The pair has also traded below its 50-day Exponential Moving Average (EMA) since mid-September. That average currently sits just above 1.1300, while the 200-day EMA lies just below 1.1500.
EUR/USD chart: 5-minute timeframe
EUR/USD chart: daily timeframe
Euro: frequently asked questions
Second only to the US Dollar in global trading activity, the Euro serves as the currency of the 20 European Union countries in the Eurozone. Its share of all foreign exchange transactions reached 31% in 2022, with average daily turnover exceeding $2.2 trillion. The world's most actively traded currency pair, EUR/USD, represents an estimated 30% of all transactions. It is followed by EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%.
Interest rates and monetary policy for the Eurozone are managed by its reserve bank, the European Central Bank (ECB), based in Frankfurt, Germany. Maintaining price stability is the ECB's main mandate, whether through controlling inflation or stimulating growth. Raising or cutting interest rates is its principal policy tool. The Euro generally benefits when rates are relatively high, or when higher rates are expected; the reverse also holds. 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.
An important economic measure for the Euro is Eurozone inflation, tracked through the Harmonised Index of Consumer Prices (HICP). An above-forecast rise in inflation, particularly beyond the ECB's 2% target, obliges the central bank to increase interest rates to bring prices back under control. When interest rates in the region are relatively high compared with those elsewhere, the Euro usually benefits. Such rates make the region a more attractive destination for global investors' funds.
The Euro can respond to economic releases because they reveal the economy's health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators capable of moving the single currency. Economic strength supports the Euro by attracting more 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. Particular importance attaches to figures from Germany, France, Italy and Spain, the euro area's four largest economies. Together, they represent 75% of the Eurozone's economy.
The Trade Balance is another key release for the Euro, showing the difference between a country's export earnings and its import spending over a specified period. Strong overseas demand for a country's exports generates additional demand for its currency as foreign buyers seek to purchase those goods, lifting its value. A positive net Trade Balance therefore strengthens a currency, while a negative balance has the opposite effect.
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