Euro climbs above 1.1600 on US–Iran peace breakthrough
- EUR/USD edges higher to around 1.1610 in Monday’s early European session.
- The US and Iran announced a framework deal for peace.
- ECB’s Nagel said the central bank is ready to hike again in July if necessary.
The EUR/USD pair gains traction to near 1.1610 during the early European trading hours on Monday. The reports that the US and Iran have reached a deal to reopen the Strait of Hormuz improved risk sentiment, supporting the Euro (EUR) against the US Dollar (USD). The US Federal Reserve (Fed) interest rate decision will be in the spotlight later on Wednesday.
Washington and Tehran have announced a framework deal for peace, which will be signed in Switzerland on Friday. US President Donald Trump said the US is lifting its naval blockade on Iranian ports and that the Strait of Hormuz will reopen after the agreement is signed.
The Fed is widely expected to keep its benchmark interest rate unchanged at a target range of 3.50% to 3.75% at its upcoming policy meeting on Wednesday. Traders will closely monitor the press conference and take more cues about how new Fed chair Kevin Warsh will lead the US central bank into its next era. Any hawkish remarks from Fed officials could lift the Greenback and act as a headwind for the major pair.
Last week, the European Central Bank (ECB) hiked its key interest rates, saying “the war in the Middle East is generating inflation pressures.” This marks the first rate increase since September 2023, after seven consecutive meetings where interest rates were kept on hold.
ECB Governing Council member Joachim Nagel said on Friday that the central bank is prepared to raise interest rates for a second straight meeting in July, if the shock from the war in the Middle East requires it.
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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
