The US and Israel have different interests in the Middle East conflict. The former wants to resolve it through diplomatic means, while the latter has refused to negotiate with Hezbollah. This rift within the coalition is weighing on the EUR/USD pair. Let's analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Geopolitics continues to support the dollar.
- The prediction market does not believe in peace in the Middle East.
- The Fed's pause may last until the end of 2027.
- Positions on the EUR/USD pair can be opened on a breakout of the 1.161–1.1655 range.
Weekly Fundamental Forecast for Dollar
Donald Trump previously used the divide-and-rule tactic successfully, and now Iran is using it against him. Tehran is threatening to walk away from the negotiations unless Israel stops attacking Hezbollah in Lebanon. However, the coalition allies have opposing plans, which is causing a rift and putting pressure on the EUR/USD pair.
When Donald Trump stated on May 23 that a deal with Iran was largely agreed upon, the odds of peace in the region by the end of June on Polymarket jumped to 75%, and the probability of the Strait of Hormuz reopening rose to 60%. However, following a series of mutual attacks between the US and Iran, these figures fell to 27% and 22%, respectively. The market does not believe the conflict in the Middle East will end anytime soon.
Likelihood of De-escalation of Middle East Conflict
Source: Wall Street Journal.
Iran is exploiting Donald Trump's desire to end the conflict peacefully to its own advantage. The armed conflict is extremely unpopular in the US, and voters are turning away from the Republicans. At the same time, driven by rising oil prices, US inflation is surging, hitting people's wallets hard.
However, if the US responds to all of Iran's threats with concessions, there is a high risk of a lousy deal. It would strengthen Iran's position in the Middle East and weaken Israel. There, voters are demanding something entirely different from the current government—a tough stance toward Hezbollah. The opposition calls the government a US puppet. This is the source of the rift between Washington and Jerusalem, which Tehran is skillfully exploiting.
For the currency market, the decline in the likelihood of a peaceful resolution to the conflict and the reopening of the Strait of Hormuz means only one thing—it is time to return to the US dollar. The greenback has risen since late February due to its status as a safe-haven asset and a sharp shift in CME derivatives forecasts for the federal funds rate.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
While the futures market had anticipated a 100-basis-point rise in borrowing costs by the end of 2027 before the conflict in the Middle East, it now believes the Fed will not make any changes by then. If Donald Trump does manage to achieve the impossible—persuading Iran, which is currently in a strong diplomatic position—then investors will be back to square one. They will once again discuss loosening the Fed's monetary policy, which would deal a blow to the US dollar.
Weekly Trading Plan for EUR/USD
However, such a scenario seems unlikely for now. Therefore, aggressive traders can continue to factor in risks on both sides and try to capture the trend by placing sell orders at 1.161 and buy orders at 1.1655 on the EUR/USD pair. Conservative traders should remain on the sidelines.
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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