Euro holds ground as US Dollar steadies and markets brace for Iran sanctions

• EUR/USD trades flat near mid-May highs as the US Dollar steadies after last week’s sharp volatility.
• Markets stay cautious ahead of fresh US sanctions on Iran and US PCE inflation data later this week.

EUR/USD trades flat on Monday as the US Dollar (USD) steadies and markets settle into a calmer tone following the sharp volatility triggered by the US Treasury’s surprise buyback announcement last week. At the time of writing, the pair trades around 1.1670, hovering near levels last seen in mid-May.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is attempting to reclaim 99.00, trading around 98.95.

Despite some near-term stabilization in the Greenback, the broader backdrop remains fragile after the Treasury’s decision revived concerns over US fiscal policy and rising government debt.

Trading is relatively subdued on Monday as investors adopt a wait-and-see approach ahead of the first major risk event of the week. The United States is preparing to announce a fresh package of sanctions against Iran later on Monday, which Treasury Secretary Scott Bessent has described as an “economic D-Day.” Iran has maintained a hard stance in response, with Foreign Ministry Spokesperson Esmaeil Baghaei saying that “Iran will use all its bilateral capabilities to confront US economic sanctions.”

Later this week, the focus shifts to the US Personal Consumption Expenditures (PCE) Price Index on Wednesday. Another soft inflation reading, following the recent moderation in CPI and PPI, could strengthen expectations that the Federal Reserve (Fed) will leave interest rates unchanged in September and put fresh pressure on the US Dollar. Fed Chair Kevin Warsh’s remarks at the Jackson Hole Symposium on Friday will provide another test for those expectations.

On the Euro side, the economic calendar is relatively light, with no major data releases scheduled, leaving EUR/USD largely driven by US Dollar dynamics. On the monetary policy front, markets widely expect the European Central Bank (ECB) to raise interest rates in September.

Eurozone watches inflation relief as ECB leans on anchored expectations

Strategists at BNY Mellon argue that “inflation remains the core issue in Europe,” even as activity shows signs of improvement. They caution that “tightening too early would be a mistake,” noting that the ECB’s latest inflation survey indicates expectations are “anchoring more firmly,” while the Euro is “near cyclical highs and already doing some of the tightening.”

Against this backdrop, BNY Mellon highlights that “Europe’s week centers on inflation relief,” with French and Spanish flash CPI on Friday the key releases, and “Spain still running much hotter than France.” German unemployment data on Friday will also offer an important “labor-market read for the Eurozone’s largest economy,” helping to frame the ECB’s next steps.