Geopolitical risks in the Middle East and Fed policies pressure the euro/dollar parity

The negative reflections of geopolitical risks in the Middle East on energy supply make it difficult for economies to fight inflation.

Rising oil prices due to geopolitical tensions increases the possibility that global central banks may accelerate the tightening of monetary policies due to inflation risks.

While ongoing inflation concerns support the predictions in money markets that the bank may raise interest rates again by the end of the year, pricing indicates that the Fed may continue its hawkish steps next year.

However, while it is expected that the policy rate will be increased by 25 basis points with a 73 percent probability at the October meeting, indecision about whether to keep it constant or increase it in December stands out.

In addition to these developments, while the employment report to be announced on Wednesday and Friday's non-agricultural employment data are expected to have an impact on these expectations, signals regarding the state of the labor market, especially from non-agricultural employment data, will be followed closely.

Increasing expectations that the Fed will rein in inflation by adopting a tighter monetary policy stance caused the dollar to gain strength against other currencies.

In international markets, the euro/dollar parity decreased by 0.3 percent during the day to 1.1332, reaching its lowest level since June 24. Euro/dollar parity was at 1.1324 on the specified date.

"The divergence in bonds was reflected in parity"

In Touch Capital Markets Senior FX Analyst Piotr Matys, in his evaluation to the AA correspondent, stated that there is a divergence between US and European bonds due to the volatility in oil prices and country-specific developments, and that this divergence is also reflected in the euro/dollar parity.

"With the gap between bond yields in the US and Europe widening in favor of the dollar, the downward pressure on the euro/dollar parity continues." Using the statement, Matys emphasized that the euro may be sensitive to macroeconomic data to be announced this week, especially non-agricultural employment in the USA.

Matys said, "If the US data weakens the hawkish expectations for the Fed, a horizontal course may be seen in the euro/dollar parity or a correctional rise in the parity may occur." he said.

Societe Generale FX Strategy Head Kit Juckes emphasized that the euro/dollar parity fell below the bottom level seen in late June 2026 and said, "The fact that the euro/dollar parity has held on to this bottom level since late June 2026 for such a long time shows that US President Donald Trump's rhetoric to keep the dollar under pressure is effective. However, high oil prices, strong economy, high bond interest rates and the Fed's tightening of monetary policy eliminate its effect with rhetoric alone." "They are not elements that can be removed." he said.

Stating that how much the decline will continue in the short term may depend on core personal consumption expenditures, non-agricultural employment and ISM manufacturing industry data to be announced in the USA this week, Juckes stated that as long as energy prices remain this high, the gradual decline in euro/dollar parity will likely continue.