Stock and currency markets are optimistic about the end of the Middle East conflict. Only persistently high oil prices are preventing the EUR/USD pair from rallying further. The US dollar is returning to its long-standing drivers: the Fed’s independence and monetary policy. Let’s analyze the situation and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Power struggles within the Fed are intensifying.
- Trump touts the upcoming agreement with Iran.
- The ECB refuses to increase interest rates.
- Long trades on the EUR/USD pair can be opened on a pullback from 1.1755 and 1.173.
Weekly Fundamental Forecast for Dollar
Stabilization instead of escalation. While fear fueled the oil rally and diplomatic efforts drove Brent prices lower, uncertainty regarding the timing and outcome of the US–Iran negotiations has sparked increased volatility and consolidation. At the same time, the US stock and Forex markets have gained confidence that the conflict is over and are returning to their old drivers—corporate earnings, interest rates, and threats to the Fed’s independence.
It is not a coincidence that Donald Trump has resumed his attacks on Jerome Powell. The US administration is not going to stop the investigation into the Fed chair, which means Congress may not approve Kevin Warsh’s appointment until May 15.
The key question is who will replace Powell once his term expires. The Fed and the US administration have differing views. Since 1935, there have been only five instances where a leadership transition was delayed. Each time, the former central bank chief remained in office. However, the US president intervened only once in 1978. This time, Trump wants to appoint a loyalist, such as Christopher Waller. The US dollar will come under pressure amid uncertainty surrounding this issue.
Oil Tanker Traffic Through Strait of Hormuz
Source: Bloomberg.
The US dollar’s decline in April was driven by a shift toward riskier assets. If the conflict is truly over, the EUR/USD rally is likely to continue. In this context, Donald Trump’s remarks that the US is close to striking a deal with Iran—a favorable one in which Tehran has agreed to all terms, including reopening the Strait of Hormuz—are being interpreted as a bullish signal. In reality, however, the world’s key oil route remains closed.
There are issues with the ceasefire in Lebanon, which Iran is demanding. Negotiations between Jerusalem and Beirut may take place in the US. However, Lebanon’s attempt to get rid of Hezbollah may lead to civil war.
Forecast for ECB Deposit Rate
Source: Bloomberg.
Meanwhile, stronger-than-expected inflation growth in Europe in March has fueled speculation about a potential tightening of the ECB’s monetary policy. Bloomberg analysts, who had not anticipated any policy changes prior to the escalation of the Middle East conflict, now expect the deposit rate to rise from 2% to 2.5% by the end of 2026. A narrowing of the spread with the federal funds rate should support the EUR/USD pair.
However, Bloomberg suggests that the Governing Council is unlikely to take action at its April meeting. Financing conditions are already sufficiently tight to restrain inflation. Such signals may prompt traders to partially lock in profits on the euro.
Weekly Trading Plan for EUR/USD
No rally lasts forever. After eight days of continuous gains, EUR/USD quotes have finally taken a step back. A pullback followed by a rebound from the support levels of 1.1755 and 1.173 may provide an opportunity 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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