EUR/USD rises as US Dollar eases on Middle East de-escalation hopes
- EUR/USD firms as the US Dollar eases after hitting ten-month highs
- Hopes of Middle East de-escalation improve sentiment, though risks remain elevated.
- ECB tightening bets contrast with Fed’s steady rate outlook.
EUR/USD edges higher on Tuesday as the US Dollar (USD) weakens across the board following its recent rally, allowing the Euro (EUR) to snap a five-day losing streak. At the time of writing, the pair is trading around 1.1551, up nearly 0.75% on the day, but remains on track to close the month in negative territory amid heightened Middle East tensions.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading near 99.90, easing after touching fresh ten-month highs of 100.64 earlier in the day.
The US Dollar’s pullback comes as improving risk sentiment weighs on demand after a Wall Street Journal report said that Donald Trump told aides he is willing to end the US military campaign against Iran even if the Strait of Hormuz remains largely closed.
Iran’s President Masoud Pezeshkian said Iran is ready to end the war but is seeking guarantees, further supporting hopes of de-escalation. However, uncertainty remains elevated as attacks across the Gulf region continue. US Secretary of Defense Pete Hegseth said on Tuesday that “the coming days will be decisive” and that “there is nothing Iran can do about it.”
The conflict has pushed Oil prices sharply higher amid ongoing supply disruptions through the Strait of Hormuz. The inflationary impact is now beginning to show in economic data, with the latest Eurozone preliminary inflation figures climbing above the European Central Bank’s (ECB) 2% target.
The Harmonized Index of Consumer Prices (HICP) rose by 1.2% MoM in March, accelerating from 0.6% in February. On an annual basis, inflation picked up to 2.5% from 1.9%, though it came in below market expectations of 2.7%.
The Core HICP increased by 0.8% MoM, unchanged from the previous month, while the annual rate edged lower to 2.3%, missing both the 2.4% forecast and the prior reading.
This strengthens the case that the European Central Bank (ECB) could consider raising interest rates in the coming months if Oil prices remain elevated.
However, markets are scaling back expectations of any immediate move that had been priced in earlier, while still pricing in around two rate hikes by year-end, as rising energy costs also fuel concerns about an economic slowdown, particularly in the Eurozone given its heavy reliance on imported energy.
Across the Atlantic, markets now expect the Federal Reserve (Fed) to keep interest rates unchanged through most of 2026, after earlier pricing in the possibility of policy tightening.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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