Even if the Strait of Hormuz were to reopen tomorrow—which is unlikely—oil prices and inflation would not fall as sharply as the US government would want. Persistently high prices in the US will prompt the Federal Reserve to raise interest rates. Let's discuss this topic and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US is envisioning a total defeat of Iran.
- The US administration is trying to de-escalate the conflict.
- The Fed may raise rates as early as now.
- Short trades can be opened if the EUR/USD pair falls below 1.154.
Weekly Fundamental Forecast for Dollar
Donald Trump has stated that he will announce a total victory over Iran within two weeks. However, given Tehran's increasingly bold attempts to escalate the situation in the Middle East, there can be no question of any victory—let alone a total one. Tensions in the region will persist even after an agreement is reached, which allows the US dollar to remain strong.
The prevailing narrative in the market is that once the Strait of Hormuz opens, oil will flow through it, prices will fall, and inflation will slow. Coupled with a decline in demand for safe-haven assets, the EUR/USD pair will likely surge. The key is not to miss the buying opportunity. That is precisely why investors are using any positive news to build long positions in the euro, whether it is Donald Trump's statement that Israel and Iran must cease hostilities, or the mere fact that the two sides have agreed to a pause.
Performance of G10 Currencies Since Middle East Conflict Started
Source: Bloomberg.
This notion suggests that the leaders will become the laggards—and vice versa. If the US dollar has become one of the leading currencies in the Forex market due to geopolitical factors, it is likely to suffer once the conflict in the Middle East is resolved.
Meanwhile, oil prices may not fall as quickly as the US administration would expect. High inflation will take a firm and lasting hold on the US economy, partly due to second-order effects. The Fed will be forced to tighten monetary policy, and it could do so right now. Indeed, inflation has been above target for quite some time, and the labor market has done more than just stabilize, returning to its strongest levels in two years.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
As a result, the futures market is pricing in a 72% probability that the Federal Reserve will tighten monetary policy in 2026. The probability of two or more rate hikes is estimated at 29%.
Investors expect even more from the ECB. However, Forex traders have recently been increasingly discussing the possibility of repeating the policy mistakes of 2008 and 2011. Back then, the European Central Bank raised rates, but the weakness of the eurozone economy forced it to aggressively cut them shortly thereafter. History risks repeating itself, as the currency bloc is barely standing on its feet—its GDP contracted in the first quarter.
Weekly Trading Plan for EUR/USD
A peace deal between the US and Iran is still a long way off, and the spillover of inflation into the US economy via second-order effects will push the Fed to raise rates. Against this backdrop, if the EUR/USD pair fails to hold above 1.154, it will signal weakness among bulls and be a reason to sell the euro. Rebounds from resistance levels of 1.1575 and 1.1615 are also suitable for opening short positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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