The US dollar rose amid expectations of a Fed rate hike, but the Washington-Tehran agreement may lead to a sharp decline. The speculators who bought the greenback will now sell it. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US and Iran are one step away from reaching an agreement.
- Kevin Warsh took the oath of office as Fed chairman.
- The US administration argues that inflation is temporary.
- Long positions can be considered if the EUR/USD pair breaks through 1.163.
Weekly Fundamental Forecast for Dollar
For a long time, markets eagerly believed that a peace deal with Iran was imminent. Now, they may have to accept that Donald Trump is in no rush to finalize it. Investors were rattled after the US president announced that an agreement with Tehran was largely complete. Meanwhile, the blockade of the Strait of Hormuz appears to be nearing its end. The EUR/USD pair opened the final trading week of spring with a gap—this time, with an upward one.
Market Expectations for Fed Funds Rate
Source: Wall Street Journal.
The decline in the major currency pair since the second half of May has been driven by shifting expectations around interest rates. Futures markets have scaled back bets on further ECB monetary tightening amid signs of weakness in the European economy. At the same time, the probability of additional Fed tightening in 2026 surged to 60% overnight. As a result, speculators increased their net long positions in the US dollar to the highest level in three weeks.
Speculative Positions on US Dollar
Source: Bloomberg.
The shift in investors' interest rate expectations was driven by the narrative that the Strait of Hormuz would remain closed. However, the near-finalized agreement between the US and Iran has become a game-changer. The deal raises the prospect of lower Brent crude prices, easing inflationary pressure in the US, and reducing the likelihood of further Fed tightening—potentially reviving expectations of future monetary easing. As a result, speculators who had been buying the greenback may begin to unwind their long positions.
Donald Trump reiterated that inflation was only temporary as Kevin Warsh took office as the new Fed chair. According to the president's chief economic adviser, Kevin Hassett, a potential deal between the US and Iran could trigger a sharp decline in energy prices, giving the Federal Reserve room to cut interest rates.
Treasury Secretary Scott Bessent argued that nothing is more temporary than a supply shock. He predicted a significant slowdown in inflation after one or two elevated inflation reports. During Kevin Warsh's inauguration, Trump stated that the administration aims to bring down high prices without undermining the strength of the US economy. With economic growth still holding at a solid pace, lower interest rates could further fuel an economic boom.
In this way, the US government is sticking with the idea of easing monetary policy, viewing the surge in inflation as temporary and hoping for a quick peak followed by a decline. If this happens, the Fed will be able to maintain a pause in its monetary expansion cycle and then resume it, provided that the Strait of Hormuz remains open and Brent prices fall sharply.
Weekly Trading Plan for EUR/USD
Given this scenario, one may adjust their trading strategy for the EUR/USD pair. If the euro settles above the 1.163 support level, long positions can be opened.
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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