EUR\/USD hovered above 1.1400 on Wednesday after earlier selling pressure, as markets weighed renewed US-Iran tensions following overnight exchanges of fire linked to attacks on commercial ships near the Strait of Hormuz earlier this week. US President Donald Trump said an interim deal with Iran was \u201cover\u201d, although Reuters later reported he did not repeat the remark during a closed NATO leaders\u2019 meeting, citing a source familiar with the talks. Risk appetite stayed fragile after Trump said the United States would \u201cprobably hit them again tonight\u201d and added, \u201cI don’t know if we’ll have an Iran deal.\u201d<\/p>\n\n
The escalation lifted crude oil prices, reviving energy-driven inflation concerns and reinforcing expectations for tighter monetary policy. The CME FedWatch Tool shows markets pricing a 68% probability of a September Federal Reserve rate hike, compared with 58% a day earlier, while the European Central Bank could also raise rates later this year. The US Dollar Index (DXY) remained above 101.00, and attention turns to the June FOMC minutes due at 18:00 GMT.<\/p>\n\n
We see EUR\/USD struggling to hold its ground around the 1.0750 level. Ongoing geopolitical risks in the Middle East are keeping crude oil prices elevated above $81 a barrel, creating a nervous, risk-off sentiment in the market. This instability is a key factor we are watching.<\/p>\n\n
The sustained high price of energy is bringing back worries about inflation, which remains above the 2% target with recent US data showing a 3.3% annual rate. This complicates the plans for both the Federal Reserve and the European Central Bank. We believe this situation reinforces a “higher for longer” interest rate environment.<\/p>\n\n
Looking at the derivatives market, expectations for a Federal Reserve rate cut are being pushed back. The probability of a rate cut by September has fallen from over 65% just a month ago to around 55% now, according to the CME FedWatch Tool. This shows the market is repricing the Fed’s likely path based on new risks.<\/p>\n\n
Given the combination of global uncertainty and a cautious Fed, we expect the US Dollar to remain well-supported, with the DXY index holding strong above the 106.00 mark. We are therefore considering strategies that benefit from continued downward pressure on EUR\/USD. This could involve using options to position for a potential break below the 1.0700 support level.<\/p>\n\n
Our immediate focus is on the upcoming US Consumer Price Index (CPI) report. A surprisingly high inflation number would likely reduce rate cut odds even further. This data will be a critical input for our short-term volatility and directional plays.<\/p>\n\n\n\n