EUR/USD rebounds amid escalated geopolitical turmoil, hovers around 1.0650

• EUR/USD attempts to recover from five-month lows amid escalated Middle-East tension.
• Iran launched explosive drones and missiles at Israel late Saturday.
• The pair received downward pressure by diverging policy scenarios for the ECB and Fed.

EUR/USD edges up to near 1.0650 during the Asian session on Monday, recovering from a five-month low of 1.0622 reached last Friday. The US Dollar (USD) gained ground due to increased dollar-buying due to geopolitical turmoil, which contributed to downward pressure on the EUR/USD pair.

Over the weekend, Iran retaliated against a suspected Israeli attack on its consulate in Syria by launching explosive drones and missiles at Israel. Despite this escalation, the markets remained relatively calm, possibly due to Iran's advance notice of the attack, which helped mitigate the risk of further escalation.

According to reports from Reuters, officials from Turkey, Jordan, and Iraq stated that Iran had provided advanced notice days before the attack, allowing measures to prevent mass casualties and a worsening of the situation. However, a US official denied this claim. Additionally, US President Joe Biden told Israel that the United States would not participate in any retaliatory actions.

The EUR/USD pair faced downward pressure as the European Central Bank (ECB) and the Federal Reserve (Fed) revealed diverging monetary policy outlooks. The ECB indicated that if underlying inflation continues to slow as expected, there could be a consideration to lower policy rates in June.

In contrast, robust US inflation and strong macroeconomic indicators are prompting the Fed to reconsider its plans for monetary easing. The probability of interest rates remaining unchanged at the June meeting has increased to 63.5% according to the CME FedWatch Tool, up from 46.8% the previous week. Investors will closely monitor seasonally adjusted Eurozone Industrial Production data and US Retail Sales figures on Monday.

Boston Federal Reserve (Fed) President Susan Collins remarked on Friday that she anticipates 'around two' rate cuts for 2024, while still expecting inflation pressures to diminish later this year. She emphasized the uncertainty surrounding the timing of potential rate cuts and noted that while a rate hike is not currently part of the baseline scenario, it cannot be entirely ruled out.