In a rapid sequence of events, investors accepted that the Fed would soon make a rate cut, and Israel launched an attack on Iran’s nuclear facilities. The ongoing conflict in the Middle East may accelerate inflation in the US. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Weak US data pushed the EURUSD pair above 1.16.
- The market increased the odds of three rate cuts by the Fed.
- The conflict in the Middle East is likely to spur inflation.
- Short trades on the euro can be considered below 1.149.
Weekly US Dollar Fundamental Forecast
A seemingly minor event has the potential to generate significant shifts in the economy and financial markets. Prior to Israel’s military action against Iran’s nuclear facilities, the situation was well-defined. Investors were growing increasingly impatient for the Fed to cut interest rates due to disappointing US statistics. This development resulted in the USD index reaching its lowest point since April 2022. However, recent developments in the Middle East may reshape the geopolitical landscape.
The increase in unemployment claims and the slowdown in producer prices have led to concerns about weak domestic demand in the US. Markets are showing an increasing inclination toward the view that the Fed will shift its focus from inflation to cooling the labor market. If the labor market continues to struggle, the US regulator will likely resume the cycle of monetary expansion shortly.
US PPI Change
Source: Bloomberg.
According to the latest CPI and PPI data, the US economy is not suffering from tariffs. The impact of these changes may become evident over time, but it is likely to be transient. The US is adapting, and a slowdown in employment growth is key for the Fed’s future policy. Following the US inflation data release, the derivatives market has increased the probability of three acts of monetary expansion in 2025 to 35%. Against this backdrop, the EURUSD pair exceeded the 1.16 mark.
Israel’s attack on Iran’s nuclear facilities has the potential to escalate into a broader military conflict in the region. In the Middle East, a failure to retaliate is often seen as a sign of weakness. Tehran will respond, and the event’s outcome will likely drive up oil prices. As a result, inflation in the US is expected to accelerate. The Fed will have the opportunity to extend the pause in the monetary expansion cycle, supporting EURUSD bears.
Notably, the market discounts everything. Even prior to Israel’s military actions in Iran, risk reversals for the US dollar had already signaled that the rally in the major currency pair would be short-lived. The indicator rose despite the greenback facing headwinds as if someone had knowledge of the escalation of the conflict in the Middle East in advance.
US Dollar Risk Reversals
Source: Bloomberg.
Investors interpreted the decline in the USD index not as a mere indication of dollar weakness but rather as a sign of eroding confidence in the greenback. Tariff threats, softer economic data, and snowballing financial hurdles are fueling the desire to divest from all US assets.
Weekly EURUSD Trading Plan
No matter how strong the trend appears, it requires correction. After reaching the first of two bullish targets on the EURUSD pair at 1.16 and 1.2, the main currency pair declined. If the price falls below the support level of 1.149, the pair will likely experience a deeper pullback, creating an opportunity to open short trades. Conversely, a rebound will allow traders to open 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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