Investors are tired not only of geopolitical tensions but also of the uncertainty surrounding the US-Iran negotiations. The markets are optimistic about a peace agreement, but if that optimism turns into disappointment, the US dollar will once again see increased demand. Let's analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Negotiations between the US and Iran are on the brink of collapse.
- An escalation of the conflict will strengthen the dollar.
- The US economy is robust.
- Short trades can be opened at 1.1615, and long trades can be considered at 1.1665.
Weekly Fundamental Forecast for Dollar
For the first time, Donald Trump has given in to Iran's threat to quit the talks if Israel keeps bombing Lebanon. The US leader claimed that Hezbollah had promised him not to attack Israel. Thanks to his conciliatory rhetoric, the EUR/USD pair recovered some of its earlier losses.
Markets are growing weary not only of geopolitics but also of the US-Iran negotiation process. Optimism regarding the conclusion of an agreement is gradually fading. The economic damage is mounting. It is particularly acute in oil-importing countries, such as the eurozone. Conversely, exporters are capitalizing on their position. The ISM Manufacturing PMI in May reached a four-year high, suggesting that the US economy is performing well.
US 10-Year Treasury Yield
Source: Bloomberg.
It is capable of withstanding both the current historically high federal funds rate and the rally in Treasury yields. The latter indicates that the market is doing the Fed's job for it—financial conditions are tightening, which is slowing inflation.
The futures market is torn between raising and holding Fed rates in 2026. According to Rabobank, the EURUSD rally's upside appears limited against this backdrop, as the pair's quotes already factor in two acts of monetary tightening by the ECB. This will be more than enough to dampen inflation expectations. They have stabilized at elevated levels in the eurozone.
The EUR/USD pair continues to be driven by geopolitics, through the lens of which investors assess inflation and the future actions of central banks. Since the last ten days of May, bulls have gained confidence, but rumors of Iran's withdrawal from negotiations forced the euro to retreat. Donald Trump immediately announced that Israel and Hezbollah had promised not to attack each other and that dialogue with Tehran would continue in order to prevent a spike in oil prices and calm the markets. However, the move was only partially successful.
S&P 500 Performance and MSCI World ex USA
Source: Bloomberg.
Uncertainty regarding the outcome of the negotiations is prompting investors to return to the US dollar as a safe-haven asset. All the more so because the US economy and stock indices are outperforming their counterparts.
If a last-minute deal between the US and Iran were to emerge, the dollar's appeal would vanish immediately. However, the significant disparity in the positions of the two sides suggests that we can only hope for an interim agreement.
Weekly Trading Plan for EUR/USD
Against this backdrop, the EUR/USD pair's upside potential appears limited. A return of optimism to the markets would provide an opportunity to buy the euro at 1.1665. Conversely, an escalation of the conflict in the Middle East would set the stage for selling at 1.1605.
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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