• EUR/USD kicks off the new week on a positive note as US-Iran diplomacy hopes weigh on the USD.
• Falling oil prices ease inflation fears and temper Fed rate hike bets, further undermining the buck.
• Traders, however, seem hesitant as the focus remains on the crucial FOMC policy meeting this week.

The EUR/USD pair builds on a modest bullish gap opening and climbs back above the 1.1400 mark during the Asian session on Monday. The intraday move up is sponsored by a broadly weaker US Dollar (USD), weighed down by renewed optimism over a diplomatic resolution to end a five-month-old US-Iran war.

The US paused its bombing campaign following 13 consecutive nights of strikes on Iranian targets late on Friday, prompting Tehran to suspend its retaliatory attacks against Washington's allies in the Middle East. US ambassador to the United Nations (UN) Mike Waltz said that while forces remained locked and loaded, President Donald Trump wants to give negotiations a little bit of room. This, in turn, boosts investors' sentiment and undermines the safe-haven Greenback.

Meanwhile, the easing in hostilities triggers a sharp fall in crude oil prices and eases inflationary concerns, tempering US Federal Reserve (Fed) rate hike expectations. This turns out to be another factor that drags the USD Index (DXY), which tracks the buck against a basket of currencies, away from the vicinity of the monthly high retested last week. Traders, however, might refrain from placing aggressive bets on the EUR/USD pair ahead of the key central bank event risk.

The US central bank is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday. Traders will look for fresh cues about the future policy path, which will play a key role in influencing the near-term USD price dynamics. Apart from this, the focus will be on further developments surrounding the Middle East crisis, which would further drive the USD demand and produce some meaningful trading opportunities around the EUR/USD pair.

According to TD Securities, the FOMC is expected to leave policy steady, with the bank stating, “We expect the FOMC to keep rates unchanged.” The team acknowledges that “higher oil prices driven by Middle East tensions have increased inflation risks and strengthened the case for a rate hike,” but they argue that “more evidence is needed to win majority support.” In their view, “hawkish momentum is building,” yet Chair Warsh is “unlikely to provide guidance,” and they anticipate “two dissents from Hammack and Logan.”