Euro flat lines below two-month low as oil-driven inflation fears support USD

The EUR/USD currency pair remained stable around the 1.1575-1.1580 range during the Asian session on Tuesday, appearing to halt a slight decline from a two-month high. Despite a minor increase in the US Dollar (USD), caution was advised before moving forward with a renewed upward trend from the 1.1350 level or the July monthly swing low.

Negative US inflation and weak consumer spending data released last week weakened expectations for immediate interest rate increases by the Federal Reserve (Fed), causing the USD Index (DXY) to reach its lowest level since June 16. However, escalating oil prices maintain inflation concerns, potentially prompting the Fed to take a more aggressive stance.

This, combined with ongoing geopolitical tensions, boosts demand for the safe-haven USD and may inhibit the EUR/USD pair's progress. In recent Iran crisis developments, President Donald Trump indicated the US does not intend to prolong the Memorandum of Understanding (MoU) with Iran, which ended on Monday. Trump also suggested declaring the Strait of Hormuz as US territory and threatened to bomb Oman if it interferes.

This regional dispute contributes to the war-risk premium and drives crude oil prices to a two-week high, exacerbating inflation worries and supporting the argument for at least one Fed rate hike this year. Consequently, market attention will be focused on the FOMC Minutes release on Wednesday, which will provide valuable insights into the Fed's future policy decisions.

This, in turn, will influence USD price movements and potentially offer a significant boost to the EUR/USD pair. Meanwhile, hope that the European Central Bank (ECB) will implement one final 25-basis-point hike at its September meeting may maintain support for the shared currency and restrict downside for the EUR/USD pair. The EUR/USD currency pair sits near the 50.0% retracement level of the April-June decline, acting as immediate resistance and a crucial barrier that bulls must overcome for further gains.

A potential upward move could propel spot prices to the 200-day Simple Moving Average (SMA) at 1.1630 and the 61.8% Fibonacci retracement at 1.1647. On the downside, initial support can be found at the 38.2% Fibonacci retracement at 1.1522, followed by the 23.6% retracement at 1.1445, while the cycle low area near 1.1320 serves as a deeper structural support if the selling trend continues.