US Dollar retreat lifts Euro towards 1.1200 ahead of US CPI

• Euro approaches 1.1200 as lower oil prices weigh on the US Dollar.
• Diplomatic efforts continue as Trump plays down the prospect of fresh strikes on Iran.
• Persistent inflation risks keep expectations of Fed and ECB rate rises in the spotlight.

At around 1.1203 at the time of writing, EUR/USD is 0.55% higher on Monday as oil prices and the US Dollar (USD) ease. Traders are assessing the latest diplomatic developments between the US and Iran.

West Texas Intermediate (WTI) is trading near $86.85 a barrel, a daily decline of more than 3%, after US President Donald Trump downplayed the prospect of fresh strikes on Iran. Qatar’s prime minister is visiting Washington, DC, to discuss efforts to end the conflict with President Donald Trump and Vice President JD Vance.

A diplomatic breakthrough is far from assured, however. According to Tehran, progress towards peace requires Washington to lift its naval blockade, release seized assets and remove sanctions. Unless the talks advance, the decline in oil prices may prove difficult to sustain, leaving inflation risks in the spotlight for both the US and the Eurozone.

With US economic growth holding up and the labour market remaining firm, the Federal Reserve (Fed) has scope to increase interest rates further in its efforts to return inflation to the 2% target.

October’s US Nonfarm Payrolls (NFP) increased by 165K, more than twice the 65K forecast, as the Unemployment Rate slipped to 4.1%. According to the CME FedWatch Tool, traders put the probability of a December rate rise at roughly 80%. That pricing, and the Dollar’s next move, could be influenced by this week’s US inflation releases: the Consumer Price Index (CPI) on Tuesday and the Producer Price Index (PPI) on Friday.

Down 0.44% on the day, the US Dollar Index (DXY) stands near 101.85. The index measures the Greenback’s performance against a basket of six major currencies.

A December rate rise is also expected by traders in the Eurozone. Having increased its deposit rate by a total of 50 basis points (bps) earlier this year, the European Central Bank (ECB) left it unchanged at 2.50% in October. Further tightening remains a cautious prospect for policymakers, who must balance the threat of higher inflation against the possibility of weaker growth.

Largely reflecting higher energy costs, annual headline inflation in the Eurozone accelerated from 3.8% in September to 4.0% in October. Core inflation, by contrast, was unchanged at 2.5%.