The Euro (EUR) weakened against the US Dollar (USD) on Monday, with EUR/USD trading around 1.1690, down approximately 0.25% on the day, as renewed Middle East tensions and expectations of further rate hikes in the US and Eurozone supported the Greenback [3]. The US Dollar Index (DXY) climbed to around 98.47, extending its rebound from near two-week lows [3]. Reports indicated that the United Arab Emirates (UAE) was attacked by Iran for the first time since a ceasefire in early April, including a drone strike at a petroleum site in Fujairah and fires on two cargo vessels off the UAE coast [3]. Additionally, Iran’s Fars news agency claimed two missiles struck a US naval vessel near Jask, though a US official denied any American vessel was hit [3].
The escalation in the Middle East has heightened geopolitical risk, contributing to a rise in energy prices and inflation across major economies [1][3]. Joachim Nagel, ECB member and Bundesbank President, stated that the longer the Middle East conflict persists, the greater the risk that inflation will remain high without ECB intervention [1]. Nagel indicated that a June rate hike by the ECB may be warranted if the inflation outlook does not improve significantly [1]. Markets are currently pricing in at least two rate hikes from the ECB, but the central bank faces challenges due to the Eurozone’s high exposure to energy shocks, which increases the risk of stagflation and limits the ECB’s ability to respond aggressively [3].
In the US, New York Fed President John Williams remarked that US monetary policy remains well positioned for an uncertain economy, with inflation likely to be 3% this year and returning to the 2% target by 2027 [2]. Williams noted that risks to both sides of the Fed's mandates have increased, and that the jobless rate is expected to stay around 4.25% to 4.50% [2]. He also highlighted that tariffs and energy are significant inflation drivers, but underlying inflation remains mostly stable [2]. Traders are now pricing in a higher likelihood of a Fed rate hike, with the CME FedWatch Tool showing the probability of a rate hike at the December meeting rising to around 33% from near zero a week ago [3].
Currency market data from all three sources show the US Dollar strengthening against major currencies, with the USD particularly strong against the Australian Dollar and New Zealand Dollar [1][2][3]. The EUR/USD pair remains under pressure, and further upside appears limited unless there is a clear resolution to the Middle East conflict and a decline in oil prices [3]. Looking ahead, market participants are closely monitoring developments in the US-Iran situation and upcoming US economic data, including the Nonfarm Payrolls (NFP) report, which could influence rate expectations [3].
CONCLUSION
Rising geopolitical tensions in the Middle East and expectations of further rate hikes in both the US and Eurozone have strengthened the US Dollar and weighed on the Euro. Central banks remain cautious, with the ECB and Fed signaling possible policy tightening if inflation risks persist. Market sentiment is risk-averse, and traders are watching for further developments in the region and key US economic data.