Slow progress in the negotiations between Washington and Tehran will keep demand for the US dollar as a safe-haven asset strong. The US economy looks better than the European one, and the ECB is unlikely to support the euro. Let's discuss these topics and draw up a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Demand for the dollar as a safe-haven asset remains strong.
- The European economy is slowing down due to geopolitical tensions and tariffs.
- The ECB's rate hike is a political mistake.
- Short trades can be opened if the price fails to break through 1.178.
Weekly Fundamental Forecast for Dollar
The markets are brimming with optimism and expect a US-Iran agreement to be reached almost overnight. However, Tehran's cautious rhetoric and a series of strong macroeconomic data from the United States suggest that rapid progress in resolving the conflict in the Middle East is unlikely, and it is too early to sell the US dollar.
Brent Crude and S&P 500 Prices
Source: Bloomberg.
Iran has backed the entire world into a corner, and it has no reason to quickly capitulate to the US until the world feels the pain. Nevertheless, financial markets are confident that the agreement will be reached. US stock indices are soaring, while inflation expectations are falling amid a drop in oil prices. As a result, the derivatives market has revisited the idea of a potential federal funds rate cut in 2026, which is putting pressure on the dollar. The probability briefly rose to 20% before declining after strong private-sector employment data from ADP.
Inflation Expectations
Source: Bloomberg.
The labor market is stabilizing, and the US economy continues to outperform its European counterpart. The eurozone, meanwhile, is grappling with elevated energy prices and the risk of US tariffs on vehicles rising from 15% to 25%. Officially, the justification is that the EU has failed to meet the terms of its trade agreement with the United States. In practice, however, Donald Trump may also be reacting to remarks by German Chancellor Friedrich Merz, who said that Iran's leadership was humiliating the US.
As for the ECB's intention to raise rates amid the Fed's passive stance, such moves by Frankfurt are either a hawkish bluff or a political blunder. They should not be taken seriously, much less considered a boost for the EUR/USD pair.
Thus, slow progress toward resolving the conflict in the Middle East will support demand for the US dollar as a safe-haven asset. The US economy looks better than the European one. The divergence in monetary policy is not driving the EUR/USD rally, given the high risk of a political misstep by the ECB.
Against this backdrop, the major currency pair is more likely to consolidate than to surge. Investors will continue to look for signals regarding its future trajectory in the news from the Middle East or macroeconomic statistics. In this regard, the release of US labor market data for April could drive EUR/USD quotes. Strong employment growth combined with rising inflation would reinforce the possibility of another Fed rate hike.
Weekly Trading Plan for EUR/USD
The EUR/USD is highly likely to consolidate within the 1.168–1.178 range, with the upper boundary proving difficult to break. Short positions may be considered if the pair attempts a breakout but then returns to the range.
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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