The EUR/USD currency pair continues to hang around a very familiar area as traders seemingly do not know what to do in this environment. It has been a question of whether the interest rate differential widens, and whether traders will run to higher rates, as is typical. This pair has recently seen that run to rates play out, but recently, especially with the jobs reports in the United States, some traders have begun to push back against the narrative.

What EUR/USD’s Sideways Trade Around $1.14 Really Signals

The larger theme in the forex market right now is one of US dollar uncertainty and the fact that there is potential inflation coming down the road that will keep the Federal Reserve more hawkish than anticipated. Currently, we also have the escalation of tensions in the Middle East that could continue to be a main driver of the US dollar, thereby making things a bit difficult. This is literally a moving target and doesn’t look to get any clearer.

Over the last couple of weeks, we have seen the EUR/USD go sideways right around the crucial 1.14 level, an area that previously had been support over the last year or so. The conviction seems lacking in the short term, but longer term, over the last month or so, we have seen a bearish flag form. The bearish flag breaking to the downside has a measured move of 1.12. This is an area that has been important multiple times in the past, so a certain amount of “market memory” will possibly be expected in this region. However, it is likely that we will have to revisit the idea of the trend and where it is going if we do reach that level.

EUR/USD Price Chart

How Middle East Headlines Can Flip EUR/USD Quickly

The consensus is one of uncertainty and one of sideways summertime action. The real risk is whether there is some type of headline that comes out of the Middle East that gets the markets in a bit of a panic. We saw a major version of that on Monday morning as traders priced in the fact that the United States was attacking the Iranians again. The rates jumped as inflation fears were stoked, as the Iranians certainly would close the Strait of Hormuz yet again. The idea that energy prices were going to rise means inflation across the board for most things, keeping the Federal Reserve tighter for longer.

Why US Rate Moves Are Now the Key Driver for EUR/USD

With that, it could lead this market to a much broader sell-off or, conversely, you could have a situation where good news comes out of the Middle East, and you see currency such as the euro rise against the US dollar in a risk appetite-driven currency move. This is the main thrust of market action right now. Until we get some kind of definitive action, the choppy market behavior could be an issue for traders to deal with.

What Today’s Choppy Setup Means for EUR/USD Traders

The most important thing to watch right now is going to be the interest rate markets as they are most certainly elevated in the United States, although they are turning a little bit lower as we head into the New York session. If they do break out to even higher levels, that should continue to put pressure on the euro as traders will go to where money is treated best, the United States. However, if rates continue to drop, that could give the euro a bit of a reprieve. As things stand right now, it looks like traders are just simply waiting for an answer to a few key questions. It is almost as if many are afraid to “front run” the next move.

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Christopher Lewis is a technical analyst and market commentator at DailyForex with more than two decades of trading experience in Forex and other leveraged markets. Based in Columbus, Ohio, he specializes in chart-based analysis of major currency pairs, stock indices, commodities, and energy markets, focusing on clear support and resistance levels, trend structure, and risk management. Christopher produces daily written and video analysis for traders who rely on technical setups to navigate volatile market conditions

As seen on: Pairs Of Aces Podcast,The Trader Guy, FXEmpire