EUR/USD gains as Trump’s Iran deadline approaches

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The Euro (EUR) rises against the US Dollar (USD) on Tuesday, as the Greenback softens amid cautious market sentiment ahead of a deadline set by US President Donald Trump for Iran to reach a deal or open the Strait of Hormuz.

EUR/USD edges higher as the US Dollar softens ahead of Trump’s Iran deadline.
Oil-driven inflation reshapes monetary policy outlook on both sides of the Atlantic.
Rising Oil prices fuel inflation concerns, shaping Fed and ECB monetary policy expectations

At the time of writing, EUR/USD is trading around 1.1571, extending gains for the second straight day, while the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 99.90 after failing to sustain gains above the 100 mark.

Donald Trump has warned that the United States (US) would destroy Iran’s energy and civilian infrastructure if no agreement is reached by 8:00 p.m. Eastern Time (00:00 GMT on Wednesday).

As the deadline approaches, Iran’s state-affiliated media outlet Tehran Times reported earlier in the day that Tehran has suspended all diplomatic and indirect lines of communication with the US. Meanwhile, Trump issued a fresh warning in a Truth Social post, saying, “A whole civilisation will die tonight, never to be brought back again. I don’t want that to happen, but it probably will.”

With Oil prices already elevated, any further escalation could deepen the economic fallout. Higher energy costs are fueling inflation and could weigh on economic growth, particularly in the Eurozone, which remains a net energy importer. In contrast, the United States, as a net energy exporter, is relatively better positioned to absorb the shock.

Latest preliminary Eurozone data show inflation is accelerating, with the Harmonized Index of Consumer Prices (HICP) rising 1.2% MoM in March, up from 0.6% in February, while annual inflation increased to 2.5% from 1.9%.

Attention now turns to US inflation data due later this week, where the Consumer Price Index (CPI) is expected to rise 0.9% MoM, up from 0.3% in February, while annual inflation is seen accelerating to 3.3% from 2.4%.

Against this backdrop, markets broadly expect the Federal Reserve (Fed) to keep interest rates on hold, while pricing in up to two rate hikes from the European Central Bank (ECB) by year-end.

Central bank messaging also reflects a cautious stance. New York Fed President John Williams said monetary policy is “well-positioned to wait and see,” while noting that the war could add “a tenth or two” to core inflation. Meanwhile, ECB policymaker Pierre Wunsch said the central bank could deliver multiple rate hikes if the Iran crisis persists, according to a report by The Wall Street Journal.

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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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