It would seem that the US-Iran deal has reduced geopolitical risks. However, Tehran intends to maintain sole control over the Strait of Hormuz, which is at odds with the US administration’s plans. Let’s discuss this topic and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US maintains pressure on Iran.
- Geopolitics is pushing Brent prices higher.
- The US dollar is rising as a safe-haven currency.
- The EUR/USD pair’s trajectory depends on the situation in the Middle East.
Weekly Fundamental Forecast for Dollar
Investors had written off the conflict in the Middle East, but it was too soon to do so. Everyone sees what they want to see. Iran viewed the agreement as an opportunity to sell its oil at a higher price while maintaining control over the Strait of Hormuz. The US saw it as opening up the world’s key oil supply route. Ultimately, their differing approaches came to the surface, hostilities resumed, and the EUR/USD pair plummeted.
Haste makes waste. In mid-June, the United States sought to swiftly end the armed conflict, which helped push Brent crude prices lower. This strategy was largely successful, with oil prices retreating to pre-conflict levels much sooner than most analysts expected. As a result, market-based inflation expectations dropped from 2.5% prior to the renewed strikes on Iran in late June to approximately 2.23%. This decline allowed Kevin Warsh to signal at the Sintra Forum in Portugal that inflation risks had eased.
US Inflation Expectations
Source: Bloomberg.
Unfortunately, consumers disagree. According to a survey by the Federal Reserve Bank of New York, respondents expect prices to rise by 3.7% over the next 12 months, the highest figure in nearly three years. Given the resumption of conflict in the Middle East and a potential rally in Brent crude, the public appears better informed than the financial markets.
However, investors are quickly revising their views. The probability of a monetary policy tightening jumped from 76% to 82% after the US resumed airstrikes against Iran and reimposed restrictions on Tehran’s oil exports. As a result, about 63 million barrels are trapped at sea, depriving Iran of foreign exchange earnings.
Market Expectations and FOMC Forecast for Interest Rate
Source: Bloomberg.
Following Kevin Warsh’s remarks at the ECB summit, investors gradually abandoned the idea of aggressive monetary tightening. The probability of two Fed rate hikes in 2026 briefly fell below 30%, allowing EUR/USD quotes to gain momentum. The resumption of armed conflict in the Middle East pushed those odds up to 42%. I wouldn’t be surprised if further escalation of geopolitical tensions brings the odds to 50%. If that happens, the US dollar will strengthen.
Everyone is pursuing their own interests, but the US administration’s position currently appears stronger. Diversion routes and declining global demand suggest that Brent will not jump to $120 per barrel, even in the event of more extensive hostilities than before. Nevertheless, Donald Trump prefers diplomacy, which offers hope for a swift de-escalation.
Weekly Trading Plan for EUR/USD
The markets are once again facing a binary scenario. An escalation of the conflict would likely strengthen the US dollar, sending the EUR/USD pair toward 1.1300. Conversely, a resumption of negotiations and signs of meaningful progress would support risk appetite, creating an opportunity to buy the euro with a target of 1.1550.
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
