EURUSD:
The euro begins the session amid a more cautious attitude toward European assets. The sharp rise in oil prices has renewed concerns about imported inflation while also increasing risks to eurozone economic growth. The upcoming ECB decision continues to support expectations of tighter monetary policy, but weak business activity limits the single currency’s ability to benefit from this factor on a sustained basis.
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The main driver for the US dollar remains demand for defensive liquidity amid escalating tensions in the Middle East. Higher US Treasury yields provide additional support to the currency. The market is considering the possibility that renewed energy-driven inflation could prompt the Federal Reserve to keep interest rates elevated for longer, despite the recent slowdown in US inflation.
As a result, the euro’s support from ECB expectations is currently outweighed by the stronger US dollar driver during this session. Higher energy costs are particularly sensitive for the eurozone, as they could weaken consumption prospects while maintaining price pressure. If geopolitical tensions and demand for the US dollar persist, the baseline scenario allows for a decline in EURUSD.
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