Euro holds steady amid caution over US midterms and US-Iran developments

• EUR/USD Steady With US Midterm Elections and US-Iran Developments in Focus
• Volatile Oil Prices Keep Inflation and Interest Rate Expectations Centre Stage
• France’s Fiscal Worries Weigh on Euro as ECB Weighs Growth Against Inflation

EUR/USD is trading around 1.1139 at the time of writing. The pair briefly topped 1.1200 on Monday but is little changed on Tuesday, with sentiment cautious as traders follow the US midterm elections. Attention is also on US-Iran developments, giving the US Dollar (USD) no clear directional impetus.

Shifting 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. Before that, oil had advanced following a Wall Street Journal (WSJ) report of a US strike on Iran’s Qeshm Island.

Oil continues to carry a geopolitical risk premium as uncertainty over the negotiations leaves traders balancing prospects for diplomatic progress against the threat of additional military action. High energy costs could keep inflation elevated for longer, strengthening expectations that central banks may have to retain tighter monetary policy for an extended period.

After raising 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. The CME FedWatch Tool indicates that traders assign a 75% probability to a further increase in December.

Downside pressure on the US Dollar is partly contained by this hawkish outlook. Around 101.80, the US Dollar Index (DXY) measures the Greenback against six major currencies.

Persistent energy-price pressures leave the energy-dependent Eurozone facing a higher import bill, weaker growth and upside risks to inflation. Fiscal worries in France create an additional drag on the Euro (EUR).

Following cumulative rate increases of 50 bps earlier this year, the European Central Bank (ECB) kept rates unchanged in October. Sustained high energy costs increase import spending and constrain growth in the energy-dependent Eurozone, while threatening to push inflation higher. France’s fiscal worries also weigh on the Euro (EUR), adding uncertainty to the economic outlook and making the ECB’s policy choices more difficult.