• EUR/USD trades near a one-week low as Middle East tensions boost demand for the US Dollar.
• Eurozone and German ZEW surveys beat expectations but fail to lift the Euro.
• Higher energy prices leave the door open to future ECB and Fed rate hikes.

EUR/USD edges lower on Tuesday as the US Dollar (USD) strengthens amid heightened tensions in the Middle East. At the time of writing, the pair trades around 1.1405, hovering near one-week lows.

Meanwhile, stronger-than-expected ZEW surveys provided little support to the Euro (EUR). Eurozone Economic Sentiment jumped to 23.4 in July from 9.5 in June, beating the forecast of 11.2. Germany’s Economic Sentiment Index climbed to 26.3 from 10.5, well above the market expectation of 18.

The US military carried out a tenth consecutive night of strikes against Iran, while Tehran targeted US military assets across the region. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.15, extending its gains for a fourth straight day.

Diplomatic efforts offer some hope of a pause in the fighting. Mediators have proposed a 10-day ceasefire aimed at reviving last month’s interim US-Iran agreement. However, continued military exchanges have disrupted energy shipments through the Strait of Hormuz, triggering a rebound in Oil prices and reigniting inflation concerns.

As a result, traders expect the European Central Bank (ECB) and the Federal Reserve (Fed) to keep monetary policy tighter for longer. Both central banks are expected to leave interest rates unchanged at their upcoming policy meetings. However, further rate hikes remain possible if inflation pressures intensify.

Euro holds tight range as ECB repricing supports but fails to spark momentum

Analysts at Scotiabank observe that short-term rates markets “are showing signs of stabilization ahead of Thursday’s ECB decision, consolidating the recent hawkish repricing that has delivered fundamental support to the EUR via yield spreads.”

In terms of policy expectations, Scotiabank highlights that “markets are pricing little change for the July 23 decision, favoring September with 22bpts of tightening currently reflected in OIS with a cumulative 43bpts by December.”

From a technical perspective, the bank’s stance remains “neutral – the EUR’s technicals are offering little in terms of momentum as the RSI shows signs of stabilization just below the neutral threshold at 50.” They add that “recent price action has been narrowly confined to a tight range roughly bound between 1.1380 and 1.1480,” and that they “remain neutral absent a meaningful push toward 1.1500 and the 50-day MA at 1.1516.”