EUR/USD steadies as markets reassess ECB and Fed outlook amid Oil surge

• EUR/USD rebounds after opening the week with a bearish gap as the US Dollar retreats from intraday highs.
• Surging Oil prices revive global inflation fears, prompting traders to reassess ECB and Fed monetary policy outlook.
• Markets await US inflation data, including CPI and PCE, due later this week.

EUR/USD regains ground on Monday after opening the week with a bearish gap. The recovery comes as the US Dollar (USD) gives up earlier gains, allowing the Euro (EUR) to rebound from its lowest level in more than three months.

At the time of writing, the pair is trading around 1.1586, after touching a daily low near 1.1507 earlier in the Asian trading session. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of major currencies, trades near 99.10, easing from a daily high around 99.70.

The war between the United States, Israel and Iran continues to dominate global market sentiment, with no clear signs of de-escalation as the conflict enters its tenth day.

Escalating military strikes and retaliatory attacks across the region are disrupting oil flows through the Strait of Hormuz, keeping investors cautious and increasing volatility across the FX market

At the same time, rising Oil prices are reviving global inflation concerns, prompting traders to reassess the monetary policy outlook for major central banks.

Since Europe is a major net importer of energy, higher Oil prices could push inflation higher in the region while weighing on economic growth, raising stagflation risks. As a result, markets have started to price a tighter policy outlook from the European Central Bank (ECB).

Investors are now pricing that the ECB could deliver up to two 25-basis-point (bps) rate increases this year, compared with earlier expectations that rates would remain unchanged through 2026.

Across the Atlantic, traders have also trimmed expectations for Federal Reserve (Fed) rate cuts. Policymakers were already concerned about persistent inflation in the United States, and the recent surge in Oil prices is reinforcing the view that the Fed may need to keep interest rates higher for longer.

However, stagflation risks are also emerging in the US after last week’s weaker-than-expected Nonfarm Payrolls (NFP) report showed the economy lost jobs while the unemployment rate ticked higher, leaving policymakers in a difficult position as they try to balance inflation risks against signs of a cooling labor market.

Looking ahead, the Eurozone economic calendar is relatively light this week, leaving EUR/USD largely sensitive to US economic developments. Market attention will focus on US inflation data, with the Consumer Price Index (CPI) due on Wednesday and the Personal Consumption Expenditures (PCE) Price Index on Friday.