EUR/USD rises slightly as markets stay cautious amid US-Iran war

• EUR/USD ticks higher as softer USD supports the Euro.
• US-Iran war keeps market sentiment cautious.
• Traders await US CPI and PCE inflation reports.

EUR/USD edges higher on Tuesday, supported by a softer US Dollar (USD), allowing the Euro (EUR) to extend gains for a second straight day. At the time of writing, the pair is trading around 1.1645 following a rebound from a near four-month low of 1.1507 touched on Monday.

Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is little changed at around 98.70.

The price action lacks follow-through buying, reflecting a cautious market mood amid the ongoing US-Iran war as traders refrain from placing aggressive directional bets.

US President Donald Trump said on Monday that the war could end “very soon,” though the timing of any resolution remains uncertain. Iran’s Islamic Revolutionary Guard Corps (IRGC) said overnight that “it is we who will determine the end of the war,” while warning ships against passing through the Strait of Hormuz.

Escalating tensions in the Middle East have raised concerns about supply disruptions and the risk of an oil-driven global inflation shock. However, crude prices dropped sharply following Trump’s comments and reports that G7 countries are discussing a coordinated release of strategic Oil reserves through the International Energy Agency (IEA), with G7 ministers currently holding talks on possible measures to stabilise global energy markets.

If such a release materialises, Oil prices could decline further. However, uncertainty remains elevated as any prolonged conflict and its broader economic impact could prompt policymakers at major central banks to reassess the monetary policy outlook.

European Central Bank (ECB) officials struck a cautious tone in comments on Tuesday. ECB policymaker Martin Kocher said the ECB “mustn’t act too swiftly” and needs to monitor the situation. Meanwhile, Madis Müller noted that the probability of the next move being a rate hike has increased but warned that policymakers should not rush.

Separately, Gediminas Šimkus said a deeper crisis could have implications for both inflation and growth and stressed the importance of staying calm ahead of the next policy meeting.

In the United States, markets also expect the Federal Reserve (Fed) to hold interest rates steady in the near term, though traders continue to price in rate cuts in the second half of the year. According to the CME FedWatch Tool, markets currently see a 57.2% probability that the Fed will deliver its first rate cut of 2026 in July.

Investors will now turn their attention to upcoming US inflation data, with the Consumer Price Index (CPI) due on Wednesday followed by the Personal Consumption Expenditures (PCE) Price Index report on Friday.