Euro maintains modest gains as US-Iran diplomacy drives Oil prices sharply lower

• EUR/USD retains small gains despite a US Dollar rebound from earlier lows.
• Oil prices slump on encouraging US-Iran diplomatic developments.
• Further interest rate increases may be necessary, ECB policymaker Peter Kažimír indicates.

EUR/USD is trading around 1.1200 at the time of writing. The pair is up 0.37% on the day, having touched a one-week high of 1.1237. Monday’s bullish bias has yet to translate into sustained upward momentum as the US Dollar (USD) recoups some earlier losses. Traders are also weighing fresh Middle East developments that triggered a sharp fall in Oil prices.

According to ISNA, Iranian President Masoud Pezeshkian said the Supreme Leader had given the government certain powers over negotiations. Axios, meanwhile, reported that US President Donald Trump supports allowing more time for diplomacy with Iran. Down more than 5% on the day, West Texas Intermediate (WTI) is trading near $96 a barrel.

Lower Oil prices ease some inflation concerns and maintain downward pressure on US Treasury yields. That should curb gains in the US Dollar. Caution also persists ahead of Tuesday’s US midterm elections. Trading around 101.70, the US Dollar Index (DXY) has recovered from an intraday low of 101.44 but remains 0.25% lower on the day. The index measures the US currency against a basket of six major peers.

October’s US ISM Manufacturing PMI reached 55.5, up from 54.5 and above the 54.6 forecast. By contrast, the Prices Paid Index fell from 77.9 to 75.2, undershooting expectations of 77.0.

A 74% probability of a December Fed rate hike is currently priced in, according to the CME FedWatch Tool. Friday’s Nonfarm Payrolls (NFP) release could influence those expectations. Policymakers have not ruled out additional tightening to return inflation to the central bank’s 2% target, though weaker employment figures could moderate rate-hike expectations.

Aa3 France Rating and ECB Guidance Support Euro, but Appeal Remains Limited

A slowdown in the Dollar’s recent momentum “does not automatically create a compelling case for the EUR.” That is the caution from analysts at DBS Group Research. In their view, “Europe’s fiscal and political uncertainties, particularly in France, and its vulnerability to elevated energy prices complicate the search for viable alternatives” to the USD.

Some region-specific concerns have nevertheless eased. DBS notes that the Euro “did find support from the European Central Bank providing clearer guidance than the Fed on the prospects of a December hike and Moody’s affirmation of France’s Aa3 sovereign debt rating,” helping to temper those concerns.

October’s final HCOB Manufacturing PMI for the Eurozone stood at 52.7, exceeding both the preliminary figure and the 52.4 forecast. Speaking on Monday, ECB policymaker Peter Kažimír said, “The question is increasingly not if further ECB action is needed but how much.” He also warned, “Markets may still underestimate what path is required.” According to Reuters, traders expect two to three ECB rate increases over the coming year.