Strike while the iron is hot. The saying aptly describes EUR/USD's reaction to the talks between the US and the Islamic Republic. Tehran initially walked away, then reported "significant progress" in the dialogue. Lifting sanctions on Iranian oil exports and unfreezing assets look like tangible gains for the country. The geopolitical premium in oil is rapidly evaporating, and with it the balance of power on FX is changing. If the dollar previously benefited from geopolitics, it now benefits from central banks.

Falling oil prices have freed the Fed's hands while simultaneously depriving its competitors of their main trump — the inflation argument for tightening policy. HSBC believes that the lack of clear leadership and greater attention to inflation support the scenario of a Fed rate hike. That, in turn, favors the US dollar via the bond-yield differential. Market expectations for Fed tightening continue to rise, while expectations for monetary restriction elsewhere have receded following the recent oil price drop.

The numbers confirm the shift in sentiment. The futures market is now almost fully pricing in a quarter-point federal funds rate hike as soon as September. Will that be enough to sustain a further slide in EUR/USD? That will depend on the Fed's actual actions.

Odds of a Fed rate hike

The ECB has already raised rates — in June, for the first time since 2023. The bank says the war in Iran has made inflation no longer purely an energy story. Governing Council member Jose Luis Escriva warned that the regulator must closely monitor the pass-through of surging oil and commodity prices into wages. The eurozone labor market is on pins and needles waiting for the first signs of that process.

However, a single rate increase was not enough for the euro to claim victory. Bank of America remains tactically short EUR/USD. In their view, the euro did not benefit from the ECB's hawkish narrative, and further currency moves will depend on inflation persistence and the Fed's stance. The real yield differential remains a particularly informative indicator — and so far it does not favor the regional currency.

If the Fed now holds two trump cards — accelerating inflation and a shrinking geopolitical premium — the ECB has only one left: another act of monetary tightening. Moreover, that is already priced into markets. Until the real rates differential reverses, EUR/USD risks remaining hostage to market expectations.

Technically, the daily chart shows a battle around the pivot level at 1.1455. A win for the bulls and a move above the pin-bar high at 1.1480 would set up long positions. Conversely, a victory for the bears would likely mean a continuation of the downtrend.