The EUR/USD currency pair traded with mild gains around 1.1405 during the early Asian session on Wednesday, supported by expectations of a hawkish stance from the European Central Bank (ECB) ahead of its upcoming interest rate decision on Thursday [1]. European government bonds rose earlier in the week as investors priced in a more aggressive ECB monetary policy path, driven by concerns over a persistent inflation threat and a geopolitical oil shock [1].
While the ECB is widely anticipated to keep its deposit rate steady at 2.25% at the July policy meeting, money markets have indicated expectations for the deposit rate to rise to 2.66% in December and 2.73% in February 2027, up from the current 2.25% [1]. Markets have also fully priced in an interest rate increase for September, according to Reuters [1].
On the geopolitical front, tensions between the US and Iran have escalated, with US President Donald Trump downplaying the likelihood of immediate negotiations as both sides exchanged strikes. Houthi militants in Yemen have threatened shipping in the Red Sea, and Trump vowed to respond if the Iran-backed group disrupted the waterway, though he did not specify the nature of the response [1]. Iran's top joint military command warned that Tehran would expand its strikes and target US and allied interests across the region if the US attacks Iran's nuclear sites, according to Xinhua news agency [1].
The article notes that rising tensions in the Middle East could boost demand for safe-haven currencies such as the US Dollar, potentially acting as a headwind for the EUR/USD pair in the near term [1].
CONCLUSION
The Euro remains supported above 1.1400 on expectations of a hawkish ECB, with markets anticipating a rate hike in September. However, escalating US-Iran tensions pose a risk, as safe-haven flows could strengthen the US Dollar and weigh on the EUR/USD pair.