Euro languishes near three-month lows against US Dollar despite progress in US-Iran talks

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EUR/USD trades under pressure on Monday, extending losses from the previous week as expectations of a hawkish Federal Reserve (Fed) underpin the US Dollar (USD), even as easing tensions in the Middle East curb safe-haven demand for the Greenback.

EUR/USD hovers near three-month lows as hawkish Fed expectations keep the US Dollar supported.
Signs of progress in US-Iran talks improve market sentiment but fail to lift the Euro.
ECB President Christine Lagarde says the central bank must remain agile in responding to the Iran shock.

The first round of face-to-face talks between the United States and Iran concluded in Switzerland on Monday, with Pakistan and Qatar acting as mediators. In a joint statement, Qatar and Pakistan said Washington and Tehran had agreed on a roadmap to reach a final deal within 60 days. The two sides also agreed to continue technical-level talks for the remainder of the week.

However, improved market sentiment on optimism surrounding US-Iran negotiations did little to help EUR/USD recover from recent losses, as hawkish Federal Reserve expectations kept the US Dollar favored over the Euro (EUR).

At last week's monetary policy meeting, policymakers stressed their commitment to returning inflation to the 2% target after price pressures accelerated in recent months due to the energy shock.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 101.00, near its highest level in thirteen months.

Across the Atlantic, the European Central Bank (ECB) is also facing a difficult trade-off between rising inflation and slowing economic growth. Policymakers responded by raising interest rates by 25 basis points earlier this month.

Speaking on Monday, ECB President Christine Lagarde said the ECB must remain agile in responding to the Iran shock and that the central bank is "well positioned" to navigate the situation. She added that the outlook remains uncertain, with upside risks to inflation and downside risks to economic growth, but noted that there is "no evidence yet of de-anchoring or second-round effects that warrant a more forceful policy action."

Focus now shifts to a busy week ahead, featuring a slate of speeches from ECB policymakers, preliminary global Purchasing Managers Index (PMI) data, the US Personal Consumption Expenditures (PCE) Price Index report and the final estimate of first-quarter US Gross Domestic Product (GDP).

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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