Higher inflation may keep US rates elevated as geopolitical tensions weigh on EUR

Higher inflation may keep US interest rates elevated, reinforcing the Dollar’s strength and weighing on EUR/USD despite fragile hopes for Middle East diplomacy. The pair retreated to 1.1660, pulling back from Wednesday’s 1.1721 high, as investors weighed the Federal Reserve’s increasingly hawkish stance. FOMC minutes from March revealed policymakers expect the path to 2% inflation will take longer than anticipated, with some members signaling that higher rates could be necessary if price pressures persist. That outlook gains urgency as Thursday’s PCE data and Friday’s CPI report loom—both expected to reflect inflationary spillovers from the closure of the Strait of Hormuz and broader regional instability. When inflation stays hot, the Fed stays patient with cuts. And when the Fed holds, the Dollar holds. That dynamic is now pressuring the Euro, even as geopolitical headlines dominate the news cycle. German industrial production fell in February, missing forecasts, but the data had little market impact compared to the Dollar’s momentum. With the Fed telegraphing a higher-for-longer rate path and inflation data poised to test those assumptions, EUR/USD’s near-term direction hinges less on Europe’s factory output and more on whether US prices show any meaningful retreat. For now, they aren’t.