The flight from risk to safe-haven assets, the damage to the European economy from the armed conflict in the Middle East, and the Fed’s prolonged pause in its rate-cut cycle paint a bearish outlook for the EUR/USD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US dollar has shown its best performance since April.
- The EU is on the verge of a new energy crisis.
- The Fed may extend its pause due to the conflict in the Middle East.
- Short trades can be considered as long as the EUR/USD pair remains below 1.164.
Weekly US Dollar Fundamental Forecast
Markets discount everything. Judging by their reaction to the armed conflict in the Middle East, the US dollar remains king among safe-haven assets. Neither gold nor Treasury bonds can compete with it. Even if World War III breaks out, investors want dollars. We can see this in the USD index’s best two-day performance since April.
US Dollar Performance
Source: Bloomberg.
Investors understand that the greenback is among the best assets today. According to the IMF, the US and Israeli attacks on Iran are making the outlook for the global economy more uncertain. In fact, a stagflation scenario is emerging, with soaring oil prices fueling inflation and slowing GDP growth. Energy-importing countries will suffer the most.
First and foremost, Europe is facing a 70% increase in natural gas prices over two trading days due to rumors of the closure of the Strait of Hormuz, followed by information about Qatar’s reduction in natural gas production. Europe has only taken a brief breather after the recent energy crisis and is now on the verge of another one.
Natural Gas Price in Europe
Source: Wall Street Journal.
Even Donald Trump acknowledged at a meeting with German Chancellor Friedrich Merz that the armed conflict in the Middle East is damaging the European economy. However, something had to be done. According to the US leader, once all this is over, oil prices will fall even lower than they were before the attack on Iran. Trump is ready to provide military escort to tankers passing through the Strait of Hormuz, ensuring the free flow of energy to the world.
The Middle East conflict may prolong the pause in the Fed’s monetary expansion cycle. According to Minneapolis Fed President Neel Kashkari, one or two rate cuts by the end of the year would be appropriate if inflation continued to slow. However, the acceleration of inflation driven by rising oil prices may force the central bank to remain on the sidelines even longer. The futures market has reduced the probability of two acts of monetary expansion in 2026 from 79% to 57%, providing support for EUR/USD bears.
Thus, growing global economic uncertainty, the return of the energy crisis to Europe, high demand for the US dollar as a safe-haven asset, and the Fed keeping rates higher for longer than expected are firmly supporting bears on the main currency pair.
Weekly EURUSD Trading Plan
The EUR/USD pair has reached the bearish targets of 1.1615 and 1.159 earlier than expected. The conflict in the Middle East is far from over, suggesting the potential for the US dollar to strengthen. As long as the euro is trading below 1.164, short trades can be considered.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.