The easing of geopolitical tensions in the Middle East and the rally in global stock markets have outweighed concerns over the ECB’s stance and the acceleration of US producer prices. Let’s examine their impact and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US calls off airstrikes on Iran.
- The ECB gives no signals on interest rates.
- The rally in US stock indices is helping the euro.
- Long positions can be opened as long as the EUR/USD pair remains above 1.1555.
Weekly Fundamental Forecast for Dollar
Donald Trump’s cancellation of the bombing of Iran and his statement that a peace deal to resolve the conflict in the Middle East is imminent caused the US dollar to post its worst daily performance in over a month. The currency, which is typically bought while battles rage, is rapidly losing ground as peace draws near.
US Dollar Performance
Source: Bloomberg.
EUR/USD bears started the session with confidence but ultimately lost momentum. The ECB’s rate hike triggered a classic “buy the rumor, sell the fact” reaction, sending the euro lower after its pre-meeting rally. Meanwhile, a 1.1% increase in US producer prices in May provided additional support for the greenback. The figure exceeded expectations and reinforced the likelihood that the core personal consumption expenditures index could accelerate to 3.4%, its highest level in three years. Against this backdrop, it is becoming increasingly difficult for Fed doves to argue that inflation is on a sustained downward trajectory.
The ECB became the first major central bank to respond to the Middle East oil shock by raising interest rates. This move was facilitated by relatively low borrowing costs in the eurozone, which remain close to neutral. As a result, Christine Lagarde retains greater flexibility to tighten policy further if inflationary pressures intensify.
ECB Forecasts for Inflation and GDP
Source: Bloomberg.
Nevertheless, the ECB’s reluctance to signal a continuation of its monetary tightening cycle sent EUR/USD prices tumbling. The central bank made its future decisions data-dependent, raised its inflation forecasts, and lowered its GDP projections. A stagflationary scenario increases the likelihood of a split within the Governing Council. Doves will point to economic weakness, while hawks will cite uncontrolled price growth. This tug-of-war risks keeping rates at their current level.
The futures market is still expecting a rate hike—and not just from the ECB. Divergence in monetary policy is a positive factor for the EUR/USD pair. However, not all forecasts are destined to come true.
Expectations for Central Bank Interest Rates
Source: Wall Street Journal.
Another matter is the de-escalation of the conflict in the Middle East and SpaceX’s long-awaited IPO. The company raised $75 billion, marking the world’s largest initial public offering. As a result, the S&P 500 soared, global risk appetite increased, and safe-haven assets faced pressure.
Iran claims that nothing has been decided yet. However, Reuters reported that the sides were moving closer to an agreement on the nuclear program and the unfreezing of Tehran’s assets. This development paves the way for peace in the Middle East and exerts significant downward pressure on both crude prices and the US dollar.
Weekly Trading Plan for EUR/USD
The pieces are falling into place for bulls. Declining Brent prices and rising US stock indices are creating a favorable backdrop for a EUR/USD rally. If the pair manages to hold above the 1.1555 support level, it would reinforce the bullish scenario and provide a basis for opening long positions.
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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