EUR/USD fluctuates between modest gains and losses heading into the weekend as traders await Tehran’s decision on a possible agreement with the United States (US) to end the war in the Middle East. At the time of writing, the pair trades around 1.1573 and is on track to post modest weekly gains.
Iranian Foreign Minister Abbas Araghchi said a memorandum of understanding (MoU) with the United States has “never been closer.” Pakistan’s Prime Minister Shehbaz Sharif also said that a final agreed text of a peace deal has been reached and that Islamabad is working closely with both sides to finalize the next steps.
However, uncertainty remains amid conflicting reports over the contents of the MoU, including the release of frozen Iranian funds, the future of Iran’s nuclear program and the reopening of the Strait of Hormuz.
As a result, traders are adopting a wait-and-see approach, keeping price action subdued, while the US Dollar (USD) also consolidates. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.75.
Apart from geopolitical developments, attention is now turning to next week’s Federal Reserve (Fed) monetary policy meeting under newly appointed Chair Kevin Warsh. Warsh takes charge at a challenging time, as elevated Oil prices have stalled the disinflation progress. US CPI accelerated to 4.2% in May, more than double the Fed’s 2% target.
While a pause is fully priced in at next week’s meeting, the focus will be on the Fed’s forward guidance and whether policymakers’ outlook aligns with market expectations for rate hikes later this year.
Across the Atlantic, traders are also looking ahead to the Eurozone’s inflation data for May. The Harmonized Index of Consumer Prices (HICP) is expected to remain unchanged at 3.2% YoY, after accelerating above the European Central Bank’s (ECB) 2% target in recent months.
The ECB raised interest rates by 25 basis points on Thursday, as policymakers respond to mounting price pressure. Any upside surprise in May inflation data would reinforce expectations that the central bank may need to maintain a restrictive policy stance for longer.
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.
