Since the start of the armed conflict in the Middle East, the US dollar has been one of the top performers in the Forex market. The end of the standoff between the US and Iran has turned it into an underdog. Let’s discuss this topic and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US and Iran are planning to sign a peace agreement.
- The Strait of Hormuz is set to reopen.
- The Fed may go from holding rates steady to cutting them.
- Long positions on the EUR/USD pair can be opened with targets of 1.165 and 1.173.
Weekly Fundamental Forecast for Dollar
It was bound to happen eventually. The US and Iran have finally agreed to reopen the Strait of Hormuz; Brent crude plummeted on expectations of massive flows through the key oil route, and the US dollar followed suit. The armed conflict in the Middle East has ended. All the best for the EUR/USD pair is just beginning.
Geopolitics has made the US dollar one of the best performers on Forex, thanks to its status as a safe-haven asset and the currency of a net energy exporter. Speculators have built up net long positions in the greenback to their highest levels since February 2025. Now, unwinding these positions is likely to turn the US currency from a frontrunner into a laggard.
Speculative Positions on US Dollar
Source: Bloomberg.
In the Forex market, everything should be viewed through the lens of monetary policy. Before the outbreak of armed conflict in the Middle East, the futures market expected the Fed to continue the cycle of monetary expansion that began in 2025. However, rising oil prices and the resulting acceleration in inflation have turned the tables. The derivatives market began to forecast a federal funds rate hike in 2026. As a result, investors shifted from selling the US dollar to buying it.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
The reopening of the Strait of Hormuz changes everything. Brent crude has fallen below $84 per barrel, losing about a third of its value from its April highs. It is clear that the price peak has passed, and with it, the peak in US consumer prices. This means that the Fed will hold the federal funds rate steady for some time, after which it will resume cutting it. The key is to ensure that second-order effects do not feed into core inflation.
Is the fate of the US dollar sealed? More likely, yes. However, what about the weakness of the European economy, with the Bundesbank lowering its GDP forecasts for Germany from 0.6% to 0.5% in 2026 and from 1.3% to 0.8% in 2027? This should be viewed as positive for the euro. When such low estimates are set, the economy has an excellent chance to exceed them.
The primary obstacle to further EUR/USD gains is the scaling back of expectations for ECB monetary tightening. However, that factor is likely to become more relevant later. For now, market optimism surrounding the end of the Middle East conflict is driving risk appetite higher. As a result, hedge funds and asset managers are expected to unwind their long US dollar positions, which should support the euro. Against this backdrop, the EUR/USD pair appears poised to move higher.
Weekly Trading Plan for EUR/USD
As geopolitical risks ease, long positions in the EUR/USD pair formed at 1.155 can be increased, targeting 1.165 and 1.173.
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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