Euro trims gains as geopolitical risks, Fed outlook support US Dollar

EUR/USD reverses its early gains on Monday and moves toward filling the bullish gap at the weekly open. The pair initially rose after a temporary pause in attacks between the United States (US) and Iran improved risk sentiment, sent Oil prices sharply lower and weighed on the US Dollar (USD).

At the time of writing, EUR/USD trades around 1.1373, retreating from an intraday high of 1.1418.

The initial optimism proved short-lived as US officials stressed that military action against Iran had not been ruled out. Iranian Foreign Ministry spokesperson Esmaeil Baghaei said the Strait of Hormuz remained closed and added that there were currently no direct talks with the United States.

The lack of concrete negotiations keeps geopolitical risks alive, limiting the downside in both the US Dollar and Oil prices.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades near 101.46, recovering from an intraday low of 101.12. Meanwhile, softer-than-expected US Durable Goods Orders did little to stop the broad recovery in the US Dollar.

West Texas Intermediate (WTI) Oil trades around $83.20 per barrel after rebounding from an intraday low of $81.28, although it is still down more than 6% on the day. Elevated energy prices keep inflation risks in focus and reinforce expectations that the Federal Reserve (Fed) may need to raise interest rates.

The Fed announces its interest-rate decision on Wednesday. The central bank is widely expected to leave rates unchanged, although traders still price in a 33% chance of a hike, according to the CME FedWatch Tool. The probability of an increase in September stands near 79%.

Economists at DBS Group Research note that “the Fed faces a tough call: sticky inflation argues for hikes, but soft demand, weak investment, muted wage growth, and heavy debt issuance support holding rates steady for now.”

Across the Atlantic, the European Central Bank (ECB) left interest rates unchanged last week and reiterated that future policy decisions would depend on incoming data, the inflation outlook and the risks surrounding it. Traders look ahead to the preliminary Eurozone Core Harmonized Index of Consumer Prices (HICP) data for July, due on Friday.