Euro weakens as US-Iran stalemate lifts oil prices

The Euro slid against major currencies on Tuesday as the collapse of momentum in US-Iran peace negotiations sent oil prices higher, compounding inflationary pressures on energy-dependent Eurozone economies and raising the prospect of further interest rate increases from the European Central Bank.

Stalemate in the Strait

The EUR/USD pair drifted below 1.1550, retreating from seven-week highs near 1.1580, while EUR/CAD extended its losing streak to a fifth consecutive session. EUR/GBP consolidated near two-week lows below 0.8550.mitrade+2

The selloff was driven by the stalling of negotiations over the Strait of Hormuz, a chokepoint for global oil shipments that has remained largely closed during the US-Iran conflict. On Monday, President Trump responded to Iran's demand for war reparations by issuing counter-demands that Tehran compensate victims of attacks and protests stretching back decades. "I have instructed my representatives to put this firmly into any, and all, future negotiations," Trump wrote on social media. Iran then ruled out further talks, with Majid Shakeri, an adviser to Iran's parliament speaker, stating: "Trump will not reach an agreement with us. We will accompany him until his term ends".tmgm+1

Brent crude climbed above $87 a barrel, roughly 7% above the previous week's close, as the diplomatic impasse dashed hopes that had briefly emerged in early August when both sides signaled a deal was near.fxstreet+1

Inflation Fears and Rate Hike Bets

The oil rally is reshaping monetary policy expectations in the Eurozone. Strategists at Rabobank cautioned that the breakdown of the US-Iran peace agreement "clearly implies downside risks to growth and upside inflation concerns" for the bloc. Deutsche Bank ↘ 0.10% noted that market pricing for an ECB rate hike in September had climbed to 90%, while Morningstar ↘ 2.81% reported traders were assigning roughly 80% odds to such a move. The ECB held its deposit rate at 2.25% in July but signaled that energy-driven inflation risks could warrant tightening at its September 10 meeting.global.morningstar+4

Markets Await US CPI

In the United States, Cleveland Federal Reserve President Beth Hammack reinforced a hawkish tone on Monday, saying current monetary policy "is not hurting the economy" and that more than one rate hike may be needed to return inflation to target. The S&P 500 fell on Tuesday as fading Hormuz optimism weighed on sentiment.cnbc+1

Investors now look to Wednesday's US Consumer Price Index report for July, expected to show headline inflation easing to 3.4% from 3.5%, for the next catalyst in currency markets.fxstreet