The EUR/USD pair may experience a decline as the US Dollar is likely to strengthen due to the prevailing uncertainty associated with tensions in the Middle East. The US and Iran have temporarily halted hostilities in the Gulf to reengage in discussions regarding the Strait of Hormuz after a series of retaliatory strikes over the past few days. Commerzbank anticipates one last rate increase from the ECB in September, as quantitative models indicate persistent inflation even in the face of falling oil and gas prices. The EUR/USD pair continues to exhibit upward momentum for the third consecutive session, trading close to 1.1390 during the Asian hours on Monday.
Despite this positive streak, the Euro’s gains could face headwinds if geopolitical uncertainty sparks a flight to safety, boosting the US Dollar. Market participants continue to exhibit a pronounced sensitivity to the shifting narratives emerging from the Middle East, as they evaluate the region’s stability and its wider implications for global risk sentiment. The primary geopolitical focus centers on the volatile situation between the United States and Iran. According to a report on Sunday, the two nations have reached an agreement to temporarily suspend recent hostilities in the Gulf and to reinitiate discussions concerning their ongoing dispute over the Strait of Hormuz.
This diplomatic opening comes after several days of retaliatory strikes initiated on Thursday when an Iranian projectile struck a cargo vessel, prompting both Washington and Tehran to accuse each other of breaching a previously established interim ceasefire from June 17. Official delegations from both nations are set to convene in Qatar on Tuesday to engage in negotiations aimed at resolving the ongoing conflict. Meanwhile, currency traders are assessing the implications of changing monetary policy expectations for the European Central Bank in the context of declining energy prices, which have contributed to alleviating short-term inflation concerns.
Nevertheless, analysts at Commerzbank anticipate that the central bank will implement one last increase in interest rates in September. Based on their quantitative modelling, despite the decrease in oil and gas prices, underlying inflation is anticipated to remain near 3% until the year’s conclusion, as businesses are likely to progressively transfer their accumulated, elevated operational costs to consumers.