EUR/USD: the euro regains some strength

The euro was consolidating its recent gains following a Federal Reserve monetary policy meeting that resulted in no change to rates, and amidst a geopolitical lull that led to a drop in crude oil prices.

To recap, last week the Federal Reserve - now led by Kevin Warsh - concluded its FOMC meeting by pausing its benchmark interest rates, although three Board members voted for a 25-basis-point hike in the cost of borrowing dollars. The message delivered at the press conference was ambiguous, with the new Fed chief breaking from his predecessors' tradition of "forward guidance."

The previous week, the ECB had opted to keep monetary policy unchanged, following a quarter-point hike in the cost of borrowing euros at the prior Governing Council meeting in June.

"The European Central Bank (ECB) chose to raise rates once; in our view, no further action is needed, even though price stability remains its sole mandate. The situation is different for the Federal Reserve (Fed)," observes Alexandre Drabowicz, Global Chief Investment Officer at Indosuez WM.

"June's inflation figure brought relief, as the knock-on effects of rising oil prices have been limited so far: all 67 economists surveyed by Bloomberg had anticipated higher inflation, and all 67 were wrong. Consequently, Kevin Warsh can maintain a hawkish tone - insisting on 'zero tolerance' for high inflation - without needing to raise rates. Notably, one-year inflation expectations have fallen below 2% for the first time under the 'Trump 2.0' administration. While markets anticipate one or two hikes this year, we believe the Fed will remain on hold and that the threshold for further tightening remains high." Geopolitical factors are also enabling the euro - quintessential "risk currency" - to lock in its recent gains against the dollar, against the backdrop of falling crude oil prices.

"We are in discussions with the Iranians, and I think there is a chance we could reach an agreement today or tomorrow aimed at reopening the strait and moving toward normalisation," Treasury Secretary Scott Bessent said in an interview with CNBC.

In an interview with Fox News, Donald Trump stated that the Strait of Hormuz would open "very soon, or else (the Iranians) will be hit very hard." He insists he "has time" and that the discussions are "very good."

On the data front, the second half of the week will be dominated by US employment figures - a key indicator of labor market strength for the Federal Reserve as it shapes its monetary policy. All eyes will be on Friday's release of the traditional Non-Farm Payrolls (NFP) report, covering US private-sector employment for July.

"However, this improvement in Eurozone economic conditions was driven by the drop in oil prices in June and the easing of tensions in the Middle East," notes Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. With the conflict having since reignited, new downside risks weigh on growth, and inflation - already high - could accelerate once again. This threat of renewed upward pressure on prices is prompting central bank policymakers to adopt a more restrictive monetary policy stance, although the marked decline in price-related PMI indices potentially offers an opportunity to delay further rate hikes until the inflation outlook becomes clearer.

Right now, the EUR/USD is trading at $1.15478.

KEY TECHNICAL FACTORS
We are suspending our short positions on the benchmark currency pair above the $1.1408 level, pending a confluence of new technical signals.

MEDIUM-TERM OUTLOOK
Based on the key technical factors mentioned, our medium-term view on the EUR/USD pair is neutral.

We will maintain this neutral stance as long as the EUR/USD exchange rate remains between the support level at $1.1460 and the resistance level at $1.1588.