EUR/USD edges higher as US-Iran talk hopes weigh on the US Dollar

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EUR/USD regains ground on Wednesday, erasing earlier losses as the US Dollar (USD) continues to weaken, allowing the Euro (EUR) to extend gains for an eighth consecutive day amid improving risk sentiment driven by hopes of renewed US-Iran talks.

EUR/USD rises for an eighth straight day as the US Dollar remains under pressure.
Optimism over potential US-Iran talks supports risk sentiment.
Oil-driven inflation reshapes Fed and ECB monetary policy outlook.

At the time of writing, the pair is trading around 1.1800, hovering near one-month highs. However, price action remains subdued amid limited geopolitical headline flow. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 98.10, holding near the six-week low reached on Tuesday.

Investors are now awaiting confirmation of a second round of peace talks, after Donald Trump said negotiations could take place “over the next two days” in Pakistan. In a separate interview with Fox Business, he added that “the Iran war can be over very soon.”

This has raised expectations that a deal could still be reached, following last week’s talks that ended without a breakthrough and prompted the United States to impose a naval blockade on the Strait of Hormuz.

Meanwhile, The Washington Post reported on Wednesday that the Pentagon is preparing to deploy thousands of additional troops to the Middle East in the coming days as the US steps up pressure on Iran to secure a deal, keeping uncertainty elevated.

Beyond geopolitical developments, Oil-driven inflation risks continue to shape expectations around the monetary policy outlook for both the Federal Reserve (Fed) and the European Central Bank (ECB). Although hopes of de-escalation have pushed Oil prices lower from recent highs, easing pressure on central banks to adopt a more aggressive tightening stance.

However, Crude prices remain well above pre-conflict levels, leaving inflation risks firmly in focus. As a result, markets now expect the Federal Reserve (Fed) to keep interest rates on hold in the coming months, while pricing in the possibility of potential rate hikes from the European Central Bank (ECB).

Looking ahead, traders will closely watch the Eurozone inflation data due on Thursday after preliminary data showed a rise driven by higher Oil prices, lifting inflation above the ECB’s 2% target.

ECB policymaker Joachim Nagel said the April policy decision will hinge on developments around the Strait of Hormuz, stressing there is “not enough clarity” and that the ECB will keep “all optionality” open. Nagel added that there is no pre-commitment on rates and reiterated the ECB’s commitment to price stability.

Cleveland Fed President Beth Hammack said on Wednesday that “rates are in a good place,” adding that the baseline is to remain on hold “for a while.”

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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