EUR/USD treads water above the 1.1400 mark on Wednesday, steadying after coming under selling pressure as traders assess renewed US-Iran tensions after both sides exchanged fire overnight following attacks on commercial ships near the Strait of Hormuz earlier this week.
US President Donald Trump said the interim deal with Iran was “over,” although Reuters later reported that he did not repeat those comments during the closed NATO leaders’ meeting, citing a source familiar with the talks.
Even so, risk sentiment remained fragile after Trump said the United States would “probably hit them again tonight” and added, “I don’t know if we’ll have an Iran deal.”
The latest escalation has pushed Crude Oil prices higher, reviving energy-driven inflation concerns and reinforcing expectations that major central banks may need to tighten monetary policy further.
According to the CME FedWatch Tool, markets are pricing in a 68% probability of a September Federal Reserve (Fed) interest rate hike, up from 58% a day earlier. Meanwhile, the European Central Bank (ECB) could also deliver another rate hike later this year.
ECB policymaker Joachim Nagel said on Wednesday, “After today’s Iran news, we’re back where we began,” adding that “meeting-by-meeting approach is appropriate right now.”
With geopolitical risks elevated and hawkish Fed expectations building, the US Dollar (USD) is likely to remain supported, keeping EUR/USD on the defensive in the near term. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is holding firm above 101.00
Traders now look ahead to the June Federal Open Market Committee (FOMC) meeting minutes, due later in the American session at 18:00 GMT, for fresh clues on the Fed’s next policy move.
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.
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