Euro consolidates as US Dollar and Oil price dynamics dominate market sentiment

• EUR/USD steadies after a volatile weekly open as Middle East tensions keep markets cautious.
• Rising energy costs continue to cloud the Eurozone growth outlook and fuel inflation concerns.
• Traders await key US and Eurozone economic data for fresh clues on ECB and Fed monetary policy paths.

EUR/USD consolidates with minor losses after a volatile start to the week as traders assess evolving geopolitical developments in the Middle East, while price action remains driven by the US Dollar (USD) and Oil price dynamics. At the time of writing, the pair is trading around 1.1733 after recovering from an intraday low near 1.1748 and filling the bearish weekly opening gap.

Fading hopes for a near-term resolution to the US-Iran war are limiting downside pressure in the US Dollar, in turn capping upside attempts in the Euro (EUR). The Greenback had previously retreated toward pre-war levels on optimism that both sides could eventually reach a deal. However, both Washington and Tehran continue to reject each other’s proposals, with disagreements over Iran’s nuclear program remaining a key sticking point.

US President Donald Trump told reporters in the Oval Office on Monday that he would meet with his national security team to discuss the Iran war. Trump also warned that the ceasefire is “on massive life support” and described it as “weak.” He told Fox News that he is considering renewing “Project Freedom.”

Meanwhile, Oil prices continue to trade at elevated levels as the standoff in the Strait of Hormuz disrupts supply flows and fuels concerns about global inflation and slowing economic growth. The Eurozone remains particularly vulnerable given its heavy dependence on imported energy.

As the inflation outlook deteriorates due to rising energy costs, expectations for monetary tightening by major central banks have increased. Traders are now pricing in at least two interest rate hikes from the European Central Bank (ECB) by year-end, while markets expect the Federal Reserve (Fed) to keep rates unchanged through the rest of the year.

ECB policymaker Martin Kocher told NZZ on Monday that the Eurozone recovery is “threatened” as inflation risks rise amid the Middle East conflict. He said the ECB would “stay alert and act promptly and decisively if needed.” When asked whether the ECB could raise interest rates at its next meeting, Kocher said that “unless the situation improves markedly, a rate hike will be inevitable soon.”

Traders now await a busy slate of economic data releases, with the US Consumer Price Index (CPI) report and Germany’s inflation data due on Tuesday, followed by the US Producer Price Index (PPI) and the Eurozone’s preliminary Q1 GDP data on Wednesday.