The Euro (EUR/USD) reversed its early gains on Monday, moving toward filling the bullish gap at the weekly open. The pair initially climbed after a temporary pause in hostilities between the United States and Iran improved risk sentiment, which led to a sharp decline in Oil prices and weighed on the US Dollar. At the time of reporting, EUR/USD traded around 1.1373, down from an intraday high of 1.1418 [1].
However, the initial optimism faded as US officials emphasized that military action against Iran remained a possibility. Iranian Foreign Ministry spokesperson Esmaeil Baghaei stated that the Strait of Hormuz was still closed and confirmed there were no direct talks with the United States, keeping geopolitical risks elevated. This uncertainty limited the downside in both the US Dollar and Oil prices [1].
The US Dollar Index (DXY) recovered to trade near 101.46 after hitting an intraday low of 101.12, despite softer-than-expected US Durable Goods Orders. West Texas Intermediate (WTI) Oil rebounded to around $83.20 per barrel from an intraday low of $81.28, though it remained down more than 6% on the day. Elevated energy prices continue to highlight inflation risks and reinforce expectations that the Federal Reserve may need to raise interest rates [1].
The Federal Reserve is set to announce its interest-rate decision on Wednesday, with the market widely expecting rates to remain unchanged. However, traders are pricing in a 33% chance of a rate hike, according to the CME FedWatch Tool, and the probability of an increase in September stands near 79%. Economists at DBS Group Research commented that the Fed faces a difficult decision, as sticky inflation supports further hikes, while soft demand, weak investment, muted wage growth, and heavy debt issuance argue for holding rates steady [1].
Meanwhile, the European Central Bank left interest rates unchanged last week and reiterated that future policy decisions would depend on incoming data, the inflation outlook, and associated risks. Market participants are now awaiting the preliminary Eurozone Core Harmonized Index of Consumer Prices (HICP) data for July, scheduled for release on Friday [1].
CONCLUSION
The Euro's initial gains were erased as persistent geopolitical risks and expectations for a hawkish Federal Reserve supported the US Dollar. With key central bank decisions and inflation data on the horizon, markets remain cautious and sensitive to further developments. The outlook for both currencies will depend on upcoming economic releases and any shifts in geopolitical tensions.