EUR/USD Update

The EUR/USD pair saw a rise after a minor dip the day before, currently trading around 1.1380 during Friday’s Asian session. Yet, the potential for further gains seems constrained. This limitation may stem from the US dollar’s likely strengthening amid rising tensions in the Middle East, which are raising concerns about climbing oil prices. An increase in oil-driven inflation is heightening expectations that the U.S. Federal Reserve might resume interest rate hikes.

Currently, money markets estimate a 35.8% chance that the Fed will raise rates this month, with an 82.1% likelihood of at least a quarter percentage point increase in September, as per the CME FedWatch tool.

Geopolitical tensions have escalated following reports that Iranian-backed Houthi rebels in Yemen attacked two Saudi oil tankers, allegedly for breaching a blockade. In retaliation, the U.S. has conducted military strikes against Iran for 13 consecutive nights. Matters intensified when President Trump indicated he was nearing a decision on a significant military operation against Iran and warned of “massive military punishment” for the Houthis and Iran if the assaults persisted.

In parallel, there are rising trade concerns as Bloomberg reported that the U.S. intends to impose new tariffs ranging from 10% to 12.5% on imports from critical trading partners. This represents a notable move by the Trump administration aimed at reshaping trade barriers following recent Supreme Court rulings. Under the proposed plan, imports from the European Union would incur a tariff of at least 10%, designed to remain compliant with existing U.S.-EU trade treaties.

Market players are also considering the latest monetary policy decisions from the European Central Bank (ECB). The ECB Governing Council reiterated its intention to bring inflation back to its medium-term target of 2%. However, they cautioned that uncertainties remain high and that the full impact of the energy crisis on inflation is yet to be fully felt. After increasing interest rates by 25 basis points in June, the ECB decided to maintain its key interest rates: deposit facility rates at 2.25%, key refinancing rates at 2.40%, and marginal lending rates at 2.65%.