EUR/USD rebounds as Fed decision nears and US-Iran tensions cap Dollar downside

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The Euro (EUR) trims a part of its intraday losses against the US Dollar (USD) on Tuesday as the Greenback loses momentum, with traders repositioning ahead of the Federal Reserve’s interest rate decision due on Wednesday while continuing to monitor developments in the Middle East.

EUR/USD rebounds from intraday lows as traders await the Fed's interest rate decision due on Wednesday.
The US Dollar eases slightly, but geopolitical tensions and firm yields keep downside pressure limited.
Traders also monitor US-Iran developments as stalled talks and Hormuz disruptions keep markets cautious.

Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.66, easing from 98.88 up nearly 0.18% on the day. However, the downside remains limited amid persistent uncertainty surrounding US-Iran tensions and firm US Treasury yields, which continue to underpin the Dollar.

The Fed is widely expected to keep interest rates unchanged in the 3.50%-3.75% range, with the outcome largely priced in by markets. Instead, the focus will be on forward guidance, as policymakers navigate risks to both sides of their dual mandate. The recent surge in Oil prices is feeding into inflation expectations, a trend increasingly reflected in recent economic data. This has prompted traders to shift toward a higher-for-longer rate outlook, compared with earlier expectations of two rate cuts before the US-Iran war escalated.

At the same time, traders are pricing in at least two rate hikes by the European Central Bank (ECB) amid mounting inflation risks from higher Oil prices, although the central bank is expected to hold rates steady at 2.00% at Thursday’s meeting as policymakers balance persistent inflation pressures against risks to economic growth, particularly given the Eurozone’s reliance on imported energy.

On the geopolitical front, efforts to end the US-Iran war appear to have stalled, with the Strait of Hormuz still largely disrupted, keeping Oil supply tight. Iran is expected to submit a revised peace proposal in the coming days, according to CNN, citing sources, after US President Donald Trump and his national security team expressed skepticism over Tehran’s earlier offer, which deferred nuclear negotiations to a later stage.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).