Euro holds steady: Why are US midterms and US-Iran developments keeping traders cautious?

• Can EUR/USD remain steady as traders track US midterm elections and US-Iran developments?
• How is oil price volatility shaping expectations for inflation and interest rates?
• Can the ECB balance growth and inflation as France’s fiscal concerns put further pressure on the Euro?

Caution prevails in the currency market on Tuesday, with EUR/USD largely unchanged as traders follow the US midterm elections. With US-Iran developments also under scrutiny, the US Dollar (USD) lacks a clear direction. The pair is trading near 1.1139 at the time of writing, having briefly moved above 1.1200 on Monday.

Shifting news headlines continue to drive volatility in oil prices. Unconfirmed reports of concessions by Washington and Tehran on Iran’s nuclear programme and frozen funds initially weighed on crude, but prices subsequently reversed direction. Earlier gains had followed a Wall Street Journal (WSJ) report of a US strike on Iran’s Qeshm Island.

A geopolitical risk premium remains embedded in oil prices amid uncertainty over the negotiations. Traders are balancing prospects for diplomatic progress against the possibility of further military action. With high energy costs threatening to keep inflation elevated, expectations are being reinforced that central banks may have to retain tighter monetary policy for longer.

After increasing interest rates by 25 basis points (bps) in September, the Federal Reserve (Fed) left them unchanged in October and reiterated its commitment to restoring price stability. According to the CME FedWatch Tool, traders assign a 75% probability to a further rate increase in December.

Downside pressure on the US Dollar is being limited by this hawkish outlook. Tracking the Greenback against six major currencies, the US Dollar Index (DXY) is trading near 101.80.

Persistently elevated energy prices increase import costs and constrain growth in the energy-dependent Eurozone, while creating upside risks to inflation. Fiscal concerns in France are a further source of pressure on the Euro (EUR).

Following rate increases totalling 50 bps earlier this year, the European Central Bank (ECB) likewise kept rates unchanged in October. The energy-dependent Eurozone faces a higher import bill and weaker growth from persistently elevated energy costs, alongside upside risks to inflation. Adding to the pressure on the Euro (EUR), France’s fiscal concerns further cloud the economic outlook and make the ECB’s policy choices more difficult.