• EUR/USD edges higher as the US Dollar gives back its early gains.
• Higher Oil prices and expectations of a Fed rate hike limit the pair’s upside.
• Traders await US CPI and Eurozone inflation data for fresh monetary policy clues.

EUR/USD trades with a mild positive bias on Monday as the US Dollar (USD) gives back its earlier gains. At the time of writing, the pair trades around 1.1424 after recovering from an intraday low of 1.1384.

The Greenback opened the week higher after the United States (US) and Iran exchanged missile and drone attacks over the weekend. Washington struck targets in southern Iran, while Tehran targeted US military facilities across the Gulf. Iran also claimed that it had once again closed the Strait of Hormuz.

In an interview with Fox News on Monday, US President Donald Trump said the United States would be the “guardian” of the Strait of Hormuz and added, “We had a deal, and they broke it.”

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, slips back below 101.00 after touching an intraday high of 101.22.

The US Dollar has failed to benefit from the latest hostilities as markets see little chance of the fighting turning into a full-blown war, while diplomatic efforts continue.

However, the US Dollar’s downside appears limited, as the situation remains fluid and energy-driven inflation concerns return to the forefront. West Texas Intermediate (WTI) crude Oil is up more than 3% on Monday, trading around $74.00 per barrel.

ING analysts noted, “With energy prices turning bid again and no signs of an imminent slowdown in US activity to take the sting out of higher prices, (keeping Fed tightening prospects alive), the Dollar should hold onto its gains.” They added that the Greenback is likely to remain favoured against low-yielding energy importers such as the Euro and the Japanese Yen.

Traders are increasingly pricing in a Federal Reserve (Fed) interest rate hike by year-end, while also expecting another rate increase from the European Central Bank (ECB).

The US Consumer Price Index (CPI) data on Tuesday and the Eurozone’s final inflation figures on Friday will be closely watched for fresh clues about the monetary policy outlook on both sides of the Atlantic.