EUR/USD holds firm as weaker US economic data and yields weigh on USD
- EUR/USD trades on the front foot as softer US yields pressure the Dollar.
- Middle East tensions keep market sentiment fragile, limiting upside in the EUR/USD.
- Markets dial up Fed and ECB rate hike bets amid energy-driven inflation risks.
The Euro (EUR) trades on the front foot against the US Dollar (USD) on Tuesday as a mild pullback in Oil prices pushes US Treasury yields lower, adding pressure on the Greenback. At the time of writing, EUR/USD is trading around 1.1701, rebounding from an intraday low of 1.1676.
Despite the intraday bounce, the upside in EUR/USD appears limited as market sentiment remains fragile following renewed hostilities in the Middle East, which could help limit losses in the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.40, down about 0.07% on the day.
Reports of fresh attacks in the Gulf region on Monday have cast doubt over the durability of the ongoing ceasefire. However, US Defense Secretary Pete Hegseth said on Tuesday that the ceasefire with Iran is “not over” despite escalating tensions in the Strait of Hormuz, adding that US President Donald Trump will decide if the recent tensions count as a violation.
This has helped ease fears of an immediate escalation and triggered a pullback in Oil prices, with West Texas Intermediate (WTI) down around 3% at the time of writing.
However, Oil prices remain elevated overall, keeping inflation risks in focus and raising expectations that major central banks may need to adopt a more hawkish stance. Traders are now pricing in at least two rate hikes from the European Central Bank (ECB) this year. That said, uncertainty remains over whether the ECB can deliver aggressive rate hikes, given the Eurozone’s high exposure to energy shocks.
ECB Governing Council member François Villeroy de Galhau said on Tuesday he does not yet see “sufficient signs for a rate hike,” while adding the bank “will raise rates if it sees second-round effects."
In the US, the CME FedWatch tool shows the Federal Reserve (Fed) is likely to remain on hold in the near term, while the probability of a rate hike at the December meeting has risen to around 27%, up from near zero a week ago.
Traders also digested the latest US economic data. US JOLTS Job Openings fell to 6.866 million in March, slightly above expectations of 6.83 million but down from 6.922 million in February. Meanwhile, the ISM Services PMI edged lower to 53.6 in April from 54.0 in the previous month, coming in just below market expectations of 53.7.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.