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EUR/USD slips as Hormuz tensions persist despite Iran ceasefire extension

  • EUR/USD weakens as Strait of Hormuz tensions offset Iran ceasefire extension.
  • US naval blockade and stalled peace talks keep geopolitical risks elevated.
  • Elevated Oil prices and Fed outlook support the US Dollar, capping EUR/USD upside.

The Euro (EUR) weakens against the US Dollar (USD) on Wednesday, as ongoing tensions in the Strait of Hormuz offset the impact of the US-Iran ceasefire extension, keeping the Greenback supported.

At the time of writing, EUR/USD is trading around 1.1712, extending losses for the second straight day. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.57, near a one-week high.

Iran’s Islamic Revolutionary Guard Corps (IRGC) said it has seized two ships in the Strait of Hormuz, according to Iranian media. The development follows earlier reports of two vessels and a third ship coming under attack in the strategic waterway, according to the UK Maritime Trade Operations (UKMTO).

The escalation comes as the US naval blockade remains in place after US President Donald Trump extended the ceasefire with Iran just hours before its expiry. The move reflects Washington’s strategy to maintain economic pressure on Tehran, while Iranian leaders have said the US must end the blockade if it wants to resume negotiations.

Trump said talks with Iran could take place as soon as Friday, according to the New York Post, while Iran’s Tasnim News Agency reported that Tehran has not yet decided whether to participate.

With key differences remaining over nuclear and missile issues, markets view the ceasefire as a temporary pause in military escalation, suggesting the conflict may not end anytime soon. This is limiting downside in the US Dollar and capping EUR/USD’s upside after a corrective rebound earlier this month.

Meanwhile, Oil prices remain elevated, keeping inflation risks in focus and shaping central bank expectations. Investors expect the Federal Reserve (Fed) to keep interest rates higher for longer, while markets are pricing in the possibility of European Central Bank (ECB) rate hikes.

On the data front, the US economic calendar is largely empty on Wednesday, leaving markets driven by geopolitical headlines. In the Eurozone, preliminary Consumer Confidence for April dropped to -20.6 from -16.3 previously, marking its lowest level in over three years and pointing to weakening household sentiment amid ongoing geopolitical tensions and higher energy prices.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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