EUR/USD treads water above 1.1550, receives support from ECB-Fed policy divergence

• EUR/USD gains ground from improved risk sentiment amid easing fears over escalating tensions in the Middle East.
• The likelihood of an ECB rate cut in September has declined to 50%, down from 60%.
• Traders anticipate the Fed to keep rates steady on Wednesday, while pricing in odds of a rate cut in September.

EUR/USD holds ground for the second successive session, trading around 1.1560 during the Asian hours on Tuesday. The pair maintains its position near 1.1631, the highest since October 2021, reached on June 12. The Euro (EUR) receives support from improved risk sentiment amid decreasing concerns of escalating tensions between Israel and Iran.

Iran reportedly asked many countries, including Oman, Qatar, and Saudi Arabia, to urge US President Donald Trump to use his influence on Israel for an immediate ceasefire, per Reuters. G7 leaders issued a statement, "We have been consistently clear that Iran can never have a nuclear weapon." They highlighted that resolving the crisis can lead to broader de-escalation of hostilities in the region.

The Euro also receives support against its peers, driven by divergent policy paths between the European Central Bank (ECB) and the US Federal Reserve (Fed). The probability of a September rate cut by the ECB slipped to 50%, down from 60%, with markets projecting the deposit rate at 1.79% by the end of 2025. ECB policymaker Joachim Nagel supported maintaining policy flexibility, citing the complex global backdrop.

Meanwhile, traders expect the Fed to keep rates unchanged on Wednesday. Investors will focus on the updated economic projections and the dot plot, as markets continue to price in the possibility of a rate cut as early as September.