EUR/USD rebounds as renewed US-Iran talks hopes lift risk sentiment

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EUR/USD rises on Friday, snapping a three-day losing streak as prospects of renewed US-Iran peace talks lift market sentiment and weigh on the US Dollar (USD). At the time of writing, the pair is trading around 1.1715, up 0.27% on the day, recovering from two-week lows.

EUR/USD rebounds as renewed US-Iran talks hopes weigh on the US Dollar.
Markets await Fed and ECB monetary policy decisions as Oil-driven inflation clouds outlook.
US consumer sentiment improves, while inflation expectations remain elevated.

CNN reported that US President Donald Trump is sending envoys Steve Witkoff and Jared Kushner to Pakistan for talks with Iran. This follows earlier reports that Iran’s Foreign Minister Abbas Araghchi is set to travel to Pakistan.

Iran’s Tasnim news agency said Araghchi will outline Tehran’s considerations for ending the war, while IRNA noted the visit is bilateral with Pakistani officials, indicating that contacts with the US remain indirect for now.

The developments have raised hopes for renewed US-Iran talks, reducing safe-haven demand for the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is easing from a one-week high near 98.94 to trade around 98.56, down about 0.27% on the day.

However, uncertainty persists over whether direct talks between Washington and Tehran will materialize. Tehran has previously ruled out negotiations under current conditions, citing the ongoing US naval blockade as a key obstacle.

Looking ahead, traders will closely monitor US-Iran developments, particularly whether Washington eases the naval blockade and Tehran moves to reopen the Strait of Hormuz. Until then, the strait remains under a dual blockade, keeping Oil prices elevated and inflation pressures in focus.

Beyond geopolitics, attention is gradually shifting to next week’s monetary policy decisions from major central banks, including the Federal Reserve (Fed) and the European Central Bank (ECB).

Both central banks are widely expected to keep interest rates unchanged amid mounting inflation concerns driven by rising Oil prices. The focus will be on forward guidance and how policymakers balance inflation risks against growth concerns.

On the data front, the University of Michigan’s Consumer Sentiment Index for April rose to 49.8, above the forecast of 47.6 and matching the previous reading. The Consumer Expectations Index also improved to 48.1 from 46.1, beating expectations. Meanwhile, 1-year inflation expectations eased slightly to 4.7% from 4.8%, while the 5-year outlook edged higher to 3.5% from 3.4%.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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