- EUR/USD may fall as escalating Middle East tensions drive up oil prices and fuel Fed rate hike expectations.
- President Trump threatens massive military strikes against Iran and plans new 10% to 12.5% global import tariffs.
- The ECB held key interest rates steady while warning that persistent energy shocks present ongoing inflation risks.
EUR/USD gains ground after posting modest losses in the previous day, trading around 1.1380 during the Asian hours on Friday. However, the potential upside for the pair could be limited as the US Dollar (USD) may regain strength, largely driven by escalating conflicts in the Middle East that threaten to push crude oil prices higher. An oil-driven inflation spike has fueled expectations that the US Federal Reserve (Fed) might resume raising interest rates.
According to the CME FedWatch tool, money markets are currently pricing in roughly a 35.8% chance of a Fed rate hike this month, alongside an 82.1% probability of at least a quarter-point hike in September.
Geopolitical tension continues to surge following reports that Yemen’s Iran-backed Houthi militant group attacked two Saudi oil tankers in the Red Sea for allegedly violating a blockade. In response, the US conducted its 13th consecutive night of military strikes on Iran. Tensions escalated further after US President Donald Trump warned of “major military punishment” for both the Houthis and Iran if attacks continue, stating he is close to deciding on a massive, unprecedented military operation against Iran.
Simultaneously, trade concerns are mounting after Bloomberg reported that the United States plans to impose new tariffs ranging between 10% and 12.5% on imports from major trading partners. This marks a major effort to rebuild the Trump administration’s trade barrier following a recent Supreme Court ruling. Under this plan, imports from the European Union will face tariffs of at least 10%, structured to remain compliant with existing US-EU trade agreements.
Market participants process the European Central Bank’s (ECB) latest monetary policy decisions. While the ECB Governing Council reaffirmed its commitment to bringing inflation down to its 2% medium-term target, it cautioned that high uncertainty persists and the full inflationary impact of the energy shock has yet to materialize. Following a 25-basis-point rate hike in June, the ECB opted to hold its key interest rates steady, keeping the deposit facility, main refinancing, and marginal lending rates at 2.25%, 2.40%, and 2.65%, respectively.
