Euro flat lines below two-month low as oil-driven inflation fears support USD

• EUR/USD steadies following the previous day’s modest pullback from a two-month top.
• Rising oil prices keep inflation risks and Fed hike bets on the table, supporting the USD.
• Bets for a September ECB rate hike move act as a tailwind for the Euro and spot prices.

The EUR/USD pair holds steady around the 1.1575-1.1580 region during the Asian session on Tuesday and, for now, seems to have stalled the previous day's modest pullback from a two-month top. However, a modest US Dollar (USD) uptick warrants some caution before positioning for the resumption of the recent move higher from the 1.1350 area, or the July monthly swing low.

Soft US inflation and weak consumer spending data released last week undermined prospects for imminent interest rate hikes by the US Federal Reserve (Fed). The outlook, in turn, dragged the USD Index (DXY) to its lowest level since June 16 on Monday. However, rising crude oil prices keep inflation jitters firmly on the table, which could force the US central bank to adopt a more hawkish stance. This, along with persistent geopolitical uncertainties, revives demand for the safe-haven Greenback and might act as a headwind for the EUR/USD pair.

In fresh developments surrounding the Middle East crisis, President Donald Trump said that the US is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday. Trump repeated his idea of declaring the critical Strait of Hormuz as a US territory and also threatened to bomb Oman if it gets in the way. The US-Iran standoff keeps the war-risk premium in play and lifts crude oil prices to a two-week top, fueling inflation worries and backing the case for at least one Fed rate hike by the end of this year.

Hence, the focus will remain glued to the release of FOMC Minutes on Wednesday, which will be looked upon for more cues about the Fed's future policy path. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the EUR/USD pair. In the meantime, growing acceptance that the European Central Bank (ECB) will deliver one final 25-basis-point (bps) rate hike at its September meeting might continue to support the shared currency and limit the downside for the currency pair.

EUR/USD daily chart

Technical Analysis

The EUR/USD pair is hovering just under the 50.0% retracement level of the April-June decline. This acts as immediate topside resistance and marks a pivotal barrier that bulls would need to reclaim to back the case for further gains. The subsequent move up could lift spot prices to the 200-day Simple Moving Average (SMA) at 1.1630 and the 61.8% Fibonacci retracement at 1.1647.

On the downside, initial support emerges at the 38.2% Fibo. retracement at 1.1522, ahead of the 23.6% retracement at 1.1445, while the cycle low area around 1.1320 forms a deeper structural floor if selling extends.

(The technical analysis of this story was written with the help of an AI tool. Know more.)