EUR/USD holds firm on Monday as the US-Iran peace deal boosts risk appetite, reducing safe-haven demand for the US Dollar (USD). At the time of writing, the pair trades around 1.1598 after hitting an intraday high of 1.1662.
The US and Iran are expected to sign a final agreement on Friday, after both sides confirmed on Sunday that they had reached a framework deal to end the four-month-long war. The development has eased fears of prolonged disruptions to energy supplies through the Strait of Hormuz, a key route for global Oil shipments.
The prospect of the Strait reopening helped push Oil prices lower at the start of the week. Lower energy prices are also seen as positive for the Eurozone economy, which remains heavily dependent on imported energy, providing additional support for the Euro (EUR).
However, traders appear reluctant to place aggressive bullish bets on EUR/USD before the agreement is formally signed, as details of the MoU remain unclear and the situation remains fluid.
A sustained decline in Oil prices would ease inflation risks and reduce pressure on the European Central Bank (ECB) to tighten monetary policy further after last week’s 25-basis-point rate increase.
ECB Governing Council member Martins Kazaks said the central bank still sees upside risks to inflation and is prepared to act again if needed. ECB policymaker Joachim Nagel said policy settings are “still broadly neutral” and warned that “second-round effects from energy” cannot be excluded. Nagel also said the ECB is “keeping all options open” for its July meeting.
Attention now turns to the Fed’s interest rate decision on Wednesday. Traders have fully priced in a pause, with the focus firmly on forward guidance and how policymakers intend to bring inflation back to the central bank’s 2% target.
US inflation accelerated to 4.2% in May, though core inflation remained relatively contained at 2.9%. At the same time, economic activity has shown resilience and the labor market has regained momentum in recent months.
Against this backdrop, the Fed can afford to remain patient before resuming rate cuts, a stance that could continue to support the US Dollar even as geopolitical tensions ease.
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.
