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- EUR/USD is seen consolidating in a narrow band as USD preserves modest recovery gains.
- Mideast tensions lift oil prices, fueling inflation fears and Fed hike bets, supporting the USD.
- Traders also seem hesitant and opt to wait for the release of the latest US inflation figures.
The EUR/USD pair struggles to gain any meaningful traction and holds steady around the 1.1545-1.1550 area during the Asian session on Tuesday. Traders seem hesitant to place aggressive bets and opt to wait for further developments surrounding the Middle East crisis and this week’s release of the latest US inflation figures. Nevertheless, spot prices remain well within striking distance of the highest level since June 17, touched last Friday.
The disappointing US Nonfarm Payrolls (NFP) report forced investors to scale back their expectations for an immediate interest rate hike by the US Federal Reserve (Fed). This, in turn, fails to assist the US Dollar (USD) to capitalize on the previous day’s modest gains and acts as a tailwind for the EUR/USD pair. Investors, however, are still pricing in the possibility that the US central bank will raise borrowing costs by the end of this year amid inflation risks stemming from volatility in oil prices due to the Iran war.
In the latest developments surrounding the Middle East crisis, Iran ruled out any future negotiations with Trump and said that it will wait until the US President’s term ends on January 20, 2029, to resume talks, dampening hopes for a swift reopening of the Strait of Hormuz. Moreover, traffic through the Bab el-Mandeb Strait remains choked due to the Iran-backed Houthis’ naval blockade against Saudi Arabia. This remains supportive of the recent rise in crude oil prices to an over one-week high, fueling inflation fears.
Cleveland Fed President Beth Hammack said on Monday that the current rate is not meaningfully restricting the economy and that there is a need for some number of rate hikes. Hammack stressed that the longer the Fed waits, the longer it misses the 2% inflation goal. Hence, the focus will be on the US Consumer Price Index (CPI) and the Producer Price Index (PPI), due on Wednesday and Thursday, respectively. The data will provide more cues about the Fed’s future policy path and influence the USD and the EUR/USD pair.
According to TD Securities, the recent inflation dynamics are likely to “keep the Fed looking to August inflation data ahead of the September meeting,” reinforcing the central bank’s data-dependent stance. The bank also highlights that “PPI on Thursday will also be a key input into PCE estimates,” underscoring the importance of upcoming producer price figures in shaping the broader inflation picture the Fed will assess.
