Euro Struggles Near 1.1750 as Safe-Haven USD Rises

Key Moments

Dollar Strength Keeps Pressure on EUR/USD

EUR/USD recovered some ground after opening lower but still traded in negative territory around 1.1750 during Asian hours on Monday. The pair remained under pressure as the US Dollar stayed firm amid a pick-up in risk aversion across markets.

Investor sentiment deteriorated following developments around Iran’s nuclear program and ongoing regional tensions, prompting sustained demand for the Greenback as a safe-haven asset. This backdrop has limited any meaningful rebound in the Euro against the Dollar, at least in the near term.

Trump Rejects Iran Proposal, Geopolitical Risks Support the Greenback

US President Donald Trump, in a post on Truth Social, characterized Tehran’s latest response as “TOTALLY UNACCEPTABLE”. The comments followed reports that Iran proposed transferring part of its highly enriched uranium stockpile to a third country while declining to dismantle its nuclear facilities.

US officials indicated that Trump is scheduled to arrive in Beijing on Wednesday, where he is expected to raise Iran, among other issues, in talks with Chinese President Xi Jinping.

According to Iranian state television, an Iranian official said Tehran’s response focused on ending hostilities on all fronts, especially in Lebanon, and on dealing with the security of shipping routes through the strait. However, no specific information was provided on the timing or process for reopening the crucial waterway.

The risk that the Middle East conflict could broaden, combined with a fragile ceasefire between the US and Iran, has underpinned safe-haven flows into the US Dollar. This dynamic is likely to continue weighing on EUR/USD in the short term.

US Labor Data: Solid NFP and Stable Unemployment

The latest labor market report from the US Bureau of Labor Statistics, released on Friday, showed that Nonfarm Payrolls (NFP) rose by 115K in April. This was below the March reading of 185K but still above the consensus forecast of 62K.

The Unemployment Rate held steady at 4.3% in April, in line with market expectations. The combination of ongoing job growth and a stable unemployment rate offered additional support for the Dollar, reinforcing its appeal amid heightened geopolitical uncertainty.

ECB Outlook: Hawkish Expectations Offer Euro Support

Despite the current downside pressure on EUR/USD, the Euro has some potential support from expectations around European Central Bank policy. Market participants anticipate that the ECB will deliver a 25 basis point rate increase at its June meeting.

According to Reuters, traders are currently pricing in a total of three rate hikes by the end of 2026. This relatively hawkish policy path compared with some peers could, over time, provide a counterweight to Dollar strength and help stabilize the Euro if risk sentiment improves.

Understanding the Euro and Its Drivers

What is the Euro?

The Euro is the common currency used by 20 European Union member states that form the Eurozone. It is the second most actively traded currency globally after the US Dollar.

In 2022, it represented 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion. The EUR/USD pair is the most traded currency pair worldwide, accounting for an estimated 30% of all FX trades. Other significant Euro pairs include EUR/JPY at 4%, EUR/GBP at 3%, and EUR/AUD at 2%.

The Role of the ECB in Euro Valuation

The European Central Bank (ECB), headquartered in Frankfurt, Germany, serves as the central bank for the Eurozone and is responsible for setting interest rates and steering monetary policy.

The ECB’s main objective is to maintain price stability, which involves managing inflation and supporting economic growth. Its primary policy tool is the adjustment of interest rates. Generally, higher interest rates – or expectations of higher rates – tend to support the Euro, while lower rates usually have the opposite effect.

The ECB Governing Council convenes eight times a year to decide on monetary policy. Decisions are taken by the heads of the national central banks of the Eurozone countries and six permanent members, including ECB President Christine Lagarde.

Impact of Inflation on the Euro

Eurozone inflation is monitored using the Harmonized Index of Consumer Prices (HICP). When inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the central bank may be compelled to raise interest rates to restore price stability.

Relatively higher interest rates compared with other major economies can make Eurozone assets more attractive to global investors, typically boosting demand for the Euro.

Economic Data and the Euro’s Performance

Economic indicators are key inputs for assessing the Euro’s outlook. Data such as gross domestic product (GDP), Manufacturing and Services Purchasing Managers’ Indexes (PMIs), employment figures, and consumer confidence surveys can all influence the currency’s direction.

A robust economic backdrop generally supports the Euro, both by attracting capital inflows and by encouraging the ECB to consider tighter policy. Conversely, weaker data tend to be negative for the single currency.

Releases from the four largest Eurozone economies – Germany, France, Italy, and Spain – carry particular weight, as these countries collectively account for 75% of the region’s total output.

Trade Balance as a Euro Driver

The Eurozone Trade Balance, which measures the difference between export revenues and import expenditures over a given period, is another important factor for the Euro.

When exports exceed imports, foreign buyers need to purchase more Euros to pay for Eurozone goods and services, which can increase demand for the currency. A positive Trade Balance therefore tends to support the Euro, while a negative balance can put downward pressure on it.