EUR/USD: Euro Dips on Gaza, Ukraine Tensions

 | Jul 22, 2014 06:04AM ET

EUR/USD lost ground on Tuesday, as the pair trades below the low-1.35 line in the European session. Continuing violence in Gaza and Ukraine has lent support to the safe-haven US dollar. On the release front, it's a busy day in the US, highlighted by Core CPI and Existing Home Sales. There are no Eurozone events on the schedule.

International trouble spots continue to grab the headlines, as nervous investors keep an eye on events Ukraine and the Middle East. Last week's downing of a Malaysian Airlines jet, apparently by pro-Russian separatists, has seriously frayed relations between Europe and the US with Russia, which have already been strained since the latter annexed Crimea. Fighting continues between the separatists and Ukrainian forces in Eastern Ukraine. The Europeans are threatening stronger sanctions against Russia, and escalating tensions within Europe does not bode well for the euro. Meanwhile, the fighting in Gaza between Hamas and Israel has intensified, as the international community scrambles to try to get the two sides to agree to a cease fire. Casualties have been mounting on both sides following Israel's ground offensive into Gaza.

On Friday, US Consumer Sentiment remained steady at 81.3 points, but this was well below the estimate of 83.5 points. A day earlier, Unemployment Claims dropped slightly to 302 thousand, beating the estimate of 310 thousand. This figure marks a seven-week low, as the economy continues to churn out impressive employment data. With Janet Yellen telling Congress that a rate hike could be pushed forward if inflation and employment data exceeds expectations, improving employment data will put more pressure on the Fed to raise rates.

Try as it might, the ECB can't seem to coax much inflation out of the Eurozone economy. Eurozone CPI, the primary gauge of consumer inflation, remained unchanged in June, posting a gain of 0.5%. This is well below the central bank's target of 2%. Germany, the Eurozone's largest economy, is also suffering from weak inflation. PPI came in at a flat 0.0%, and the manufacturing inflation index has failed to post a gain in 2014. Faced with weak inflation and growth levels in the Eurozone, the ECB will be under pressure to take some action at its August policy meeting.