Euro declines as US Dollar gains on Middle East uncertainty

EUR/USD remains subdued for the third successive day, trading around 1.1500 during the Asian hours on Tuesday. The pair continues to hold losses as the US Dollar (USD) finds support from ongoing uncertainty in the Middle East, despite lingering hopes for a diplomatic breakthrough between the United States (US) and Iran. Any signs of escalating tensions between the two nations could drive crude oil prices higher, potentially prompting the Federal Reserve (Fed) to hold interest rates at elevated levels for longer.

Diplomatic signals remain tense over the critical waterway. US President Donald Trump announced that his latest offer of talks is a "last chance" for Iran, following his decision to call off a major attack on the Islamic Republic. Trump expressed expectations that negotiations would begin shortly to reopen the Strait of Hormuz and address US concerns regarding Iran's nuclear program.

However, General Mohsen Rezaei, advisor to Iran's Supreme Leader, firmly rejected these conditions, stating that Iran will absolutely not permit a second corridor in the Strait and warning that any foreign warships or military forces deployed for that purpose will be targeted.

On the monetary policy front, Fed Chair Kevin Warsh is reportedly weighing changes to the central bank's operations. Reports indicate Warsh has floated a proposal to hold six rate-setting meetings per year, supplemented by two additional meetings focused on broader economic policy.

Market participants are now turning their attention to Friday's US July jobs report for further guidance on the path of US interest rates. Nonfarm Payrolls are projected to increase by 83,000—up from 57,000 previously—while the Unemployment Rate is expected to rise slightly to 4.3% from 4.2% in June.

Meanwhile, the Euro could see support from improving risk sentiment following a sharp decline in crude oil prices, which fell on hopes of an eventual US-Iran agreement to reopen the Strait of Hormuz and ease regional conflict fears. While the drop in oil prices led money markets to modestly scale back expectations for further European Central Bank tightening, a rate hike by September remains largely priced in.

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