European currency weakens amid energy risks and strong US dollar
On Tuesday, September 29, the EUR/USD pair trades in the range of 1.1356–1.1374 dollars per euro, near two-month lows. In September, the euro has already lost about 2% after approaching $1.20 in August. One of the key factors of pressure remains the events in the Middle East and the rise in energy prices.
The main geopolitical factor for the currency market remains the negotiations between the US and Iran. On September 28, American and Iranian representatives held separate contacts through the mediation of other countries. Iran's proposal for a cessation of hostilities and the restoration of the Strait of Hormuz is being discussed. However, previous ceasefire agreements have been repeatedly broken, and US President Donald Trump earlier rejected the latest Iranian initiative.
For EUR/USD, the situation around Iran has several channels of influence. The persisting risks of disruptions in oil and gas supplies support energy prices. Brent oil rose to around 105 dollars per barrel the day before. For Europe, this is a particularly sensitive factor, since the increase in the cost of imported energy worsens the trade balance and intensifies inflationary pressure.
Against this background, the euro finds itself in a more difficult position. ECB President Christine Lagarde stated on September 28 that the European economy simultaneously faces elevated inflation risks and risks of slowing growth. The ECB has already raised its inflation forecast for 2027 and 2028 to 2.5% and 2.1%, respectively, mainly due to higher energy prices.
Additional support for the dollar comes from expectations regarding the Fed. High energy prices amplify inflation risks in the US, and yields on US government bonds remain elevated. Market expectations for a possible further Fed rate hike have increased, which supports the attractiveness of dollar-denominated assets.
In the coming days, traders' attention will be focused on three factors at once: the development of US-Iran negotiations, the dynamics of oil and gas, and new US macroeconomic statistics, including PCE inflation data and the labor market. If diplomatic contacts between Washington and Tehran lead to a sustainable de-escalation, a decline in energy prices may create conditions for a recovery in EUR/USD. If tensions intensify, demand for the dollar as a safe-haven asset and rising energy prices may maintain pressure on the euro.
Thus, the EUR/USD pair is currently under the influence of two major forces at once — geopolitics and monetary policy. In the short term, news from the Middle East may cause particularly sharp movements in the euro and dollar.
