EUR/USD slipped below 1.1400 and traded near 1.1380 in early Asian hours on Wednesday, extending losses as markets weighed developments around a potential US-Iran peace deal. US President Donald Trump said Iran had “fully and completely” agreed to allow nuclear inspections, while Iran’s Foreign Minister Abbas Araghchi said negotiations on the nuclear issue have not yet started. Iran’s chief negotiator added that the Strait of Hormuz will “never return to its pre-war conditions” and that Iran will keep control of the waterway.
Separately, a new round of talks between Israel and Lebanon opened in Washington, DC, on Tuesday, aimed at ending fighting in Lebanon between Iran-backed Hezbollah and Israel. With geopolitical risks unresolved, demand has tilted towards the US Dollar. The move was reinforced after a hawkish Federal Reserve meeting chaired by Kevin Warsh last week lifted expectations for a year-end rate rise; CME FedWatch shows markets pricing a 37.4% chance of at least a 25 bps hike at the July meeting, up from 8.5% a week earlier.
Euro Weakness Amid Dollar Strength
The Euro is showing weakness, trading below 1.0750 against a stronger US Dollar. This trend is mainly driven by changing views on when the Federal Reserve will finally begin to lower interest rates. We see this dollar strength as a key factor for the coming weeks.
Recent US inflation data came in slightly above expectations at 3.1%, making the Federal Reserve’s job more complicated. Consequently, market odds for a rate cut by the September meeting have dropped from over 60% to around 35% in just the last week. This sudden shift is supporting the dollar’s value.
Geopolitical And Market Uncertainties Drive Safe-Haven Flows
Adding to the market uncertainty are renewed trade tensions between major economic blocs. In these situations, capital often flows into the relative safety of the US Dollar. This could put additional downward pressure on risk-sensitive currencies like the Euro.
We believe traders should consider strategies that benefit from a falling EUR/USD. This could involve buying put options on the Euro or using bear put spreads to limit costs. With market uncertainty rising, positioning for increased volatility in the near term seems prudent.
We’ve seen this pattern before, particularly during the 2022-2023 hiking cycle where inflation proved difficult to control. Central banks often have to remain hawkish for longer than the market initially predicts. This historical precedent suggests the dollar’s current strength could have more room to run.
