EUR/USD holds firm as investors reevaluate ECB and Fed expectations following Oil price spike

EUR/USD Rebounds as US Dollar Weakens

On Monday, the EUR/USD currency pair recovered after starting the week with a downward gap. This rebound was driven by the US Dollar (USD) relinquishing its earlier strength, enabling the Euro (EUR) to bounce back from its lowest point in over three months.

Currently, the pair is trading near 1.1586, having previously dipped to a session low of around 1.1507 during Asian hours. Meanwhile, the US Dollar Index (DXY)—which measures the Greenback’s performance against a selection of major currencies—has retreated to approximately 99.10 after reaching a daily peak close to 99.70.

Geopolitical Tensions Drive Market Volatility

Ongoing conflict involving the United States, Israel, and Iran continues to shape global investor sentiment, with no resolution in sight as the standoff enters its tenth day.

Intensifying military actions and retaliatory strikes in the region are disrupting oil shipments through the Strait of Hormuz. This has heightened caution among investors and increased volatility in the foreign exchange markets.

Rising Oil Prices and Inflation Concerns

The surge in oil prices is reigniting worries about global inflation, prompting traders to reconsider the monetary policy outlook for leading central banks.

As Europe relies heavily on imported energy, elevated oil costs may drive inflation higher in the region while also dampening economic growth—raising the threat of stagflation. Consequently, markets are now factoring in a more restrictive policy stance from the European Central Bank (ECB).

There is growing speculation that the ECB could implement as many as two 25-basis-point rate hikes this year, a shift from previous expectations that interest rates would remain steady through 2026.

US Policy Outlook and Labor Market Challenges

Across the Atlantic, traders have also scaled back their expectations for interest rate cuts by the Federal Reserve (Fed). Persistent inflation concerns in the US, now exacerbated by rising oil prices, are reinforcing the belief that the Fed may need to maintain higher rates for an extended period.

However, the risk of stagflation is also surfacing in the US, following last week’s disappointing Nonfarm Payrolls (NFP) report, which revealed job losses and a higher unemployment rate. This leaves policymakers facing the challenge of managing inflation while addressing signs of a slowing labor market.

Key Data to Watch This Week

Looking ahead, the Eurozone economic calendar is relatively quiet this week, making EUR/USD movements particularly sensitive to US economic news. Market participants will be closely watching US inflation figures, with the Consumer Price Index (CPI) scheduled for release on Wednesday and the Personal Consumption Expenditures (PCE) Price Index due on Friday.