De-escalation of the conflict in the Middle East will likely trigger a rally in EUR/USD quotes. The US dollar may face a sell-off as a safe-haven asset. The euro will benefit from falling oil prices. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US and Iran have reached an agreement.
- The EUR/USD pair went on a rollercoaster ride.
- The narrowing of divergences points to a potential rally in the euro.
- Long positions on the EUR/USD pair can be considered if the price breaks through the 1.166 resistance level.
Weekly Fundamental Forecast for Dollar
According to Bloomberg, the US and Iran have agreed to extend the ceasefire for 60 days. Within 30 days, Iran will remove all mines from the Strait of Hormuz to reopen it. However, the full terms of the agreement are not public yet. Their release will be a catalyst for major shifts in global markets, including the EUR/USD pair.
The major currency pair has been on a rollercoaster ride following the latest escalation of the conflict in the Middle East. Iran attacked commercial ships in the Strait of Hormuz, to which the US responded with a strike on decision-making centers. Iran's retaliation in the form of a missile launched toward Kuwait was intercepted. As a result, EUR/USD quotes tumbled, but Scott Bessent's remarks that Washington and Tehran have everything they need to conclude a deal brought the euro back to the starting point.
The Bloomberg consensus forecast suggests that the USD index will fall by 1% by the end of the second quarter and by 2% by the end of the third. Pressure on the greenback will come not only from declining demand for safe-haven assets but also from narrowing divergences in economic growth and monetary policy.
US Interest Rate and G10 Average Rate
Source: Bloomberg.
Wells Fargo Securities notes that the gap in US GDP growth relative to other G10 countries has not been this wide in over 25 years, except during the 2020–2021 pandemic. The outperformance of US stock indices relative to their foreign counterparts has reached extreme levels and is at high risk of a pullback. At the same time, the interest rate spread will narrow amid more aggressive monetary tightening by other central banks compared to the Fed.
The futures market estimates the probability of a federal funds rate hike in 2026 at 46%. Investors believe that Japan and the UK will raise borrowing costs by 40 bps, and the eurozone will increase them by 60 bps.
The scenario of a weakening US dollar due to narrowing divergences in economic growth and monetary policy is already materializing. The second estimate of US GDP for the first quarter was revised down from 2% to 1.6%, while the personal consumption expenditures price index—the Fed's preferred inflation gauge—jumped 3.8% in April. This stagflationary backdrop will curb FOMC hawks' plans to increase interest rates.
The Fed's counterparts will not tighten monetary policy as aggressively as markets expect. Initially, the euro is likely to rise following the release of the terms of the US-Iran deal. However, this rise will likely be limited.
Weekly Trading Plan for EUR/USD
A de-escalation of the conflict in the Middle East presents a compelling case for buying the EUR/USD pair if it pierces the 1.166 resistance. However, as the major currency pair moves higher, the risk of a pullback will mount, as the US dollar is not out of the fight yet.
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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