The new phase of the conflict in the Middle East is not much different from the previous one. Events are unfolding at a faster pace, prompting the EUR/USD pair to initially decline amid the escalation before recovering its losses. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The IMF has lowered its GDP forecast for the eurozone.
- The FOMC minutes turned out to be hawkish.
- The TACO trade is returning to the financial markets.
- Long trades can be considered if the EUR/USD pair breaks through 1.1445 and 1.147.
Weekly Fundamental Forecast for Dollar
Investors have seen this story before. The only difference is that what was once a series has now become a short film. At the outset of the Middle East conflict, the US dollar strengthened as oil prices surged. Its status as both a safe-haven currency and the currency of a net energy exporter fueled selling pressure on EUR/USD quotes. However, the greenback soon gave back those gains—a move that initially puzzled the market. The same pattern is unfolding again, and this time the reason is much clearer.
At first glance, all the fundamentals appear to favor the US dollar: falling stock indices, signaling weaker risk appetite; 10-year Treasury yields climbing to their highest levels since May; the IMF’s updated forecasts; and even the minutes from the June FOMC meeting. Nevertheless, the EUR/USD has rebounded above 1.1400 rather than extending its decline.
IMF Forecasts for Global GDP Growth
Source: Wall Street Journal.
The International Monetary Fund raised its GDP forecast for the US in 2027 from 2.1% to 2.2%, while the forecast for this year remained unchanged at 2.3%. The mass investments in AI and fiscal stimulus were cited as factors supporting the strong economy. In contrast, the eurozone’s GDP forecast for 2026 was lowered from 1.1% to 0.9%, as the IMF expects oil prices to average 32% higher than in 2025. This will negatively impact the currency bloc, which is heavily reliant on energy imports.
The June FOMC meeting minutes showed that Fed officials are prepared to raise rates if inflation accelerates and intend to keep them elevated if the PCE index gradually slows. At the same time, an increasing number of Fed regional bank presidents are worried that higher energy prices will feed into core inflation through second-order effects, and that investments in AI will trigger another wave of acceleration in the PCE index following the impact of tariffs and the conflict in the Middle East.
US Dollar Rate and Crude Price
Source: Bloomberg.
The hawkish tone of the FOMC minutes and the rally in Brent crude briefly emboldened EUR/USD bears. However, the pair quickly recovered its losses despite an intensification of US airstrikes on Iran. One possible explanation is that European government bond yields have risen faster than US Treasury yields, providing additional support for the euro.
In fact, the TACO trade appears to have resurfaced again. Donald Trump’s statement that negotiations with Tehran were over may ultimately prove to be part of a broader negotiating strategy—a familiar shift from escalation to de-escalation. Investors have seen this pattern before. It was therefore no surprise when the US president later suggested that Iran was looking for a path back to negotiations. The sequence sounds familiar because the market has already learned to expect it.
Weekly Trading Plan for EUR/USD
As I noted in my previous analysis, any signs of de-escalation in the Middle East conflict would support buying the EUR/USD pair, with an initial upside target of at least 1.1550. Accordingly, the strategy of opening long positions on pullbacks toward 1.1400 remains valid. A decisive breakout above 1.1445, followed by a move through 1.1470, would provide confirmation to add to existing 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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Source: Original Article
