Euro holds steady as US Dollar struggles for traction

The Euro (EUR) maintained its steady position near 1.1623 against the US Dollar (USD) during Tuesday's American trading hours. The US Dollar Index (DXY) hovered near its lowest level in over two weeks, trading around 98.82, as the Greenback struggled to gain momentum despite expectations of hawkish Federal Reserve (Fed) actions.

Escalating Middle Eastern tensions and the sharp rise in the Japanese Yen (JPY) failed to revive defensive demand for the USD, which was further strained by rising oil prices and inflation concerns, thereby strengthening the case for tighter monetary policy. Next week's key tests for the Fed will be its Producer Price Index (PPI) on Thursday and Consumer Price Index (CPI) on Friday, ahead of the September 15-16 policy decision.

Markets believe there is a 60% chance that the Fed will raise interest rates by 25 basis points at that meeting. The Euro's outlook is heavily reliant on the European Central Bank's (ECB) interest-rate decision on Thursday, where a 25 basis point increase to 2.50% is expected. This follows the June hike and would be the second rate increase this year.

Eurozone inflation rose to 3.3% in August, up from 2.9% in July, primarily due to higher energy costs. As the anticipated rate hike is already priced in, the Euro's response may hinge more on President Christine Lagarde's remarks and the ECB's revised economic projections. Analysts highlight that recent data revisions have strengthened the Eurozone's growth narrative, with Q2 output revised up from 0.4% to 0.6% quarter-over-quarter, driven by stronger Irish performance.

However, traders remain cautious, with ING Bank noting that the Euro's current strength may prove difficult to maintain in the near term due to USD expectations and rising energy prices.