Euro Holds Gains as Tensions Boost Dollar Demand

Key Moments

Euro Steadies After Post-NFP Rally

The EUR/USD pair begins the new week on a muted footing, trading just above 1.1550 during the Asian session. The pair is consolidating within close range of a new peak since June 17, reached following Friday’s weaker-than-expected US employment data.

Friday’s move higher in the euro came after the latest US Nonfarm Payrolls (NFP) report signaled a softer labor market backdrop. The immediate reaction, however, has faded somewhat as the US Dollar stages a modest recovery.

Soft US Jobs Data Weighs on Fed Rate Hike Prospects

The closely followed NFP release showed that the US economy shed 23K jobs in July, sharply undershooting consensus forecasts for an 80K increase. In addition, the prior month’s figure was revised down, now showing an addition of 20K jobs compared with the initially reported 57K.

Further details from the report indicated that annual wage inflation, measured by the change in Average Hourly Earnings, slowed to 3.2% from 3.4%. This moderation in pay growth counterbalanced a decline in the Unemployment Rate to 4.1% from 4.2% in June, softening the argument for additional interest rate increases by the US Federal Reserve.

Middle East Risks Offer Support to the US Dollar

Despite the weaker jobs data, the US Dollar’s initial sell-off has proven short-lived. Ongoing uncertainty over efforts to reopen the key Strait of Hormuz is underpinning safe-haven demand for the Greenback.

The US Dollar Index (DXY), which tracks the currency against a basket of major peers, is attempting to extend Friday’s late rebound from its lowest level since June 17. This recovery is acting as a drag on EUR/USD, with participants hesitant to establish aggressive positions while geopolitical risks remain elevated.

Over the weekend, Iran said that discussions with Oman aimed at setting up a secure shipping corridor through the strategic waterway are close to an agreement. However, Tehran warned that any accord would not lead to an immediate reopening.

Geopolitical tensions were further stirred as Iran-backed Houthi militants in Yemen claimed responsibility for a recent strike on Saudi Arabia’s Jazan refinery, and a tanker operated by Abu Dhabi National Oil Co. was attacked in the Strait. These developments are keeping a geopolitical risk premium embedded in markets, supporting oil prices and reinforcing inflation concerns, alongside expectations for at least one Federal Reserve rate hike in 2026.

Market Outlook for EUR/USD

The combination of softer US labor data and heightened geopolitical risk presents a mixed backdrop for EUR/USD. The pair has recently advanced from the mid-1.1300s, last seen on July 28, but the current environment argues for caution before assuming that the latest uptrend will extend significantly.

Investor attention is now turning toward the upcoming release of US consumer inflation data on Wednesday. The report is expected to provide additional insight into the Fed’s policy trajectory. At the same time, incoming headlines related to the Middle East situation are likely to exert a strong influence on US Dollar dynamics and could generate short-term trading opportunities in EUR/USD.