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

• EUR/USD remains steady with US midterm elections and US-Iran developments in focus.
• Volatile oil prices keep attention on the outlook for inflation and interest rates.
• Euro faces further pressure from France’s fiscal concerns as ECB weighs growth against inflation.

At around 1.1139 at the time of writing, EUR/USD is largely unchanged on Tuesday, having briefly moved above 1.1200 on Monday. Trading remains cautious as market participants follow the US midterm elections. Developments between the US and Iran are also under scrutiny, keeping the US Dollar (USD) from establishing a clear direction.

Shifting news continues 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. An earlier rise followed a Wall Street Journal (WSJ) report of a US strike on Iran’s Qeshm Island.

With the outcome of negotiations uncertain, oil continues to carry a geopolitical risk premium. Traders are balancing the prospect of diplomatic progress against the possibility of further military action. High energy costs threaten to keep inflation elevated, strengthening expectations that central banks may have to retain tighter monetary policy for longer.

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. According to the CME FedWatch Tool, markets assign a 75% probability to a further rise in December.

The prospect of continued hawkish policy helps limit losses in the US Dollar. Meanwhile, the US Dollar Index (DXY), a measure of the Greenback against six major currencies, is trading near 101.80.

Persistently elevated energy costs increase the import bill for the energy-dependent Eurozone, hamper growth and create upside risks to inflation. Fiscal concerns in France present an additional obstacle for the Euro (EUR).

Having raised rates by a total of 50 bps earlier this year, the European Central Bank (ECB) likewise kept them unchanged in October. The energy-dependent Eurozone faces a higher import bill and weaker growth from sustained high energy costs, alongside risks of higher inflation. Adding to the pressure on the Euro (EUR), France’s fiscal concerns further obscure the economic outlook and make the ECB’s policy choices more difficult.