Euro remains under pressure due to tensions in the Middle East
On Monday, September 28, the EUR/USD pair is trading in the area of 1.1373–1.1391 dollars per euro, being near two-month lows. Last week the pair fell to about 1.1359. The dollar is strengthening amid the ongoing tension around the US–Iran conflict.
US–Iran negotiations remain the main geopolitical factor
Investors are closely following diplomatic contacts between Washington and Tehran. US President Donald Trump has said earlier that negotiations continue and he hopes to eventually reach an agreement. However, the situation remains unstable: at the end of last week Trump rejected an Iranian proposal related to restoring the operation of the Strait of Hormuz, although he also allowed for continuations of negotiations in the coming days.
For financial markets, this is especially important because of oil. After the US refusal of Iran's proposed agreement option, Brent prices rose more than 1% on Monday, exceeding 106 dollars per barrel.
How the Middle East affects EUR/USD
The influencing mechanism is fairly direct. Increased tension in the Middle East raises concerns about oil supply disruptions and leads to growth in energy prices. For Europe, higher oil prices are a negative factor, since it increases import expenses and inflation risks.
At the same time, when the global investment climate worsens, demand for the dollar as a traditional safe-haven asset rises. That is why strengthening geopolitical risks is capable of simultaneously pressuring the euro and supporting the US currency.
Besides, expensive oil can complicate the task for central banks. Accelerating inflation in the US may force investors to expect a more hawkish Fed policy, which also increases the dollar's attractiveness. Reuters notes that specifically the rise in oil prices and expectations concerning Fed policy are now among the supporting factors for the American currency.
Thus, for EUR/USD, the near-term dynamics will largely depend on the development of US–Iran negotiations. If diplomatic contacts lead to a sustainable agreement and a reduction of geopolitical tension, the risk premium in oil and the dollar may decrease. If negotiations break down and the conflict around Iran and the Strait of Hormuz intensifies, demand for the dollar as a safe-haven asset may persist, creating additional pressure on the euro.
At the same time, the currency market will simultaneously react to US macroeconomic statistics and expectations concerning further Fed decisions. Therefore, geopolitics now remains an important, but not the only, factor in EUR/USD movement.
