The euro (EUR) managed to reduce some of its earlier losses against the US dollar (USD) on Tuesday. This came as the greenback seemed to lose steam, with traders reassessing their positions ahead of Wednesday’s Federal Reserve interest rate decision. There’s also ongoing attention to the situation in the Middle East. Currently, the EUR/USD is trading around 1.1707, bouncing back from a low of 1.1677 earlier in the day.
In related news, the U.S. Dollar Index (DXY), which measures the dollar against six major currencies, was around 98.66—up about 0.18% for the day, although it had peaked at 98.88 earlier. Still, the potential for a further decline seems limited due to ongoing uncertainties surrounding U.S.-Iran relations and steady U.S. Treasury yields that bolster the dollar.
Most analysts anticipate that the Federal Reserve will likely keep interest rates steady in the 3.50% to 3.75% range, a scenario already factored into the market. The real attention will be on any forward guidance regarding potential risks to both sides of their dual mandate. With recent spikes in oil prices influencing inflation expectations—something visible in the latest economic data—traders have begun pivoting toward longer-term interest rate forecasts, speculating on two possible rate cuts before tensions with Iran escalate further.
On the other hand, market participants seem to be bracing for at least two rate hikes from the European Central Bank (ECB), as inflation risks continue to rise alongside oil prices. Nevertheless, it’s expected that the ECB will maintain interest rates at 2.00% in their upcoming Thursday meeting, balancing the need to address risks to economic growth against persistent inflationary pressures, particularly given the eurozone’s reliance on imported energy.
Additionally, data from the ECB Bank Lending Survey for the first quarter of 2026, released Tuesday, indicated that inflation expectations are climbing across all sectors. Notably, one-year ahead expectations jumped from 2.5% in February to 4.0% in March. Meanwhile, three-year expectations moved from 2.5% to 3.0%, and five-year expectations crept up from 2.3% to 2.4%.
Meanwhile, on the geopolitical side of things, attempts to resolve the conflict between the U.S. and Iran seem to be faltering. The Strait of Hormuz remains disrupted, and oil supplies continue to be tight. Reports suggest Iran might revise its peace proposal in the coming days, especially after U.S. President Donald Trump and his national security team expressed doubts about Iran’s previous suggestion to postpone nuclear negotiations.
