EUR/USD under Pressure as De-escalation Hopes Shift Rate Expectations

Commerzbank's Thu Lan Nguyen says rising hopes for de-escalation in the Middle East have put pressure on the EUR/USD. The US Dollar has gained ground against the Euro as interest rate expectations shifted in favor of the United States.

The main driver behind this shift was a change in inflation and monetary policy views, with the market-implied interest rate differential between the US and the euro area moving in favor of the dollar. This reflects the view that inflation and monetary policy in the euro area are more heavily influenced by energy prices than in the United States.

Both the European Central Bank (ECB) and Federal Reserve (Fed) are expected to deliver one additional rate hike by year-end, but the market reaction suggests investors expect the ECB to adopt a more cautious stance if US-Iran relations continue to improve and energy prices correct markedly lower. This could put further downward pressure on EUR/USD in the near term.