EUR/USD held steady around the 1.1400 level on Wednesday, consolidating after earlier declines driven by concerns over renewed US-Iran tensions following recent exchange of fire between the two nations in the Strait of Hormuz region.
US President Donald Trump stated that the interim agreement with Iran had collapsed, though Reuters noted he did not repeat this claim during a closed NATO summit meeting, according to sources familiar with the proceedings.
Nevertheless, risk sentiment stayed cautious after Trump warned that the United States would likely conduct further strikes and questioned whether an Iran deal would materialize.
The escalating tensions pushed crude oil prices higher, reigniting concerns about energy-related inflation and bolstering expectations that central banks may need to accelerate monetary tightening measures.
Data from the CME FedWatch Tool indicates that markets now assign a 68% probability to a September Federal Reserve rate increase, up from 58% the previous day. Similarly, the European Central Bank is expected to consider additional rate hikes before year-end.
ECB executive Joachim Nagel commented during Wednesday’s session, “After today’s Iran news, we’re back where we began,” emphasizing that a “meeting-by-meeting approach remains appropriate at this juncture.”
Amid elevated geopolitical risks and growing expectations of Fed tightening, the US Dollar (USD) is expected to maintain its strength, keeping EUR/USD under pressure in the near term. The US Dollar Index (DXY), which measures the greenback against a basket of six major currencies, remains well above 101.00.
Market participants now turn their attention to the June Federal Open Market Committee (FOMC) minutes, scheduled for release later in the American trading session at 18:00 GMT, in search of further guidance on monetary policy direction.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
