The renewed conflict in the Middle East initially failed to trigger a meaningful rally in the US dollar, as investors doubted that Brent crude would climb back to $120 per barrel. That assumption is now being put to the test. Let’s examine the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The dollar is strengthening as geopolitical tensions escalate.
- Banks are divided on the future of Fed interest rates.
- The euro may find support from the ECB meeting.
- Range-trading strategies remain appropriate as long as the pair stays within the 1.1370–1.1470 range.
Weekly Fundamental Forecast for Dollar
Markets may ignore negative factors for a long time, but sooner or later their destructive impact is bound to come into focus. The S&P 500 shrugged off the resurgence of conflict in the Middle East, and the US dollar showed little change. Investors were confident that Brent would not return to its March highs due to stabilizing factors. However, as the conflict escalates, confidence is giving way to doubt, leading to a decline in stock indices and EUR/USD quotes.
Goldman Sachs warned that Brent could rise to $120 per barrel if the conflict in the Middle East drags on until the end of the year. While this is not the bank’s base-case scenario, the risks associated with this outcome are quite significant. The US and Iran are locked in a tit-for-tat cycle, and the longer the standoff lasts, the more difficult it will be to return to the negotiating table.
US Treasury Yield and Fed Interest Rate
Source: Bloomberg.
At the same time, Brent’s consolidation at elevated levels casts doubt on whether the July slowdown in inflation is the first sign of a break in the uptrend. More likely, this is a pullback, and a resumption of price growth could lead to a continued rally in Treasury yields. Traders demand higher interest rates from the Fed to fulfill its mandate, and monetary policy tightening is good news for the US dollar.
Views on the extent of the expected monetary tightening are divided. While traders anticipate the Fed’s first move in October or December, BlackRock considers such forecasts to be overly optimistic, and Goldman Sachs does not expect rate hikes in 2026. In contrast, Bank of America asserts that the central bank will tighten monetary policy three times before the end of this year. In its view, derivatives prices already reflect two of these hikes. To bring inflation back to the 2% target, as Kevin Warsh has noted, more aggressive measures are required.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
The US dollar’s prospects are in the hands of the Fed, while other developments—whether they involve the release of US economic data or events in the Middle East—are viewed through the lens of monetary policy. That said, every little bit helps. Investors have to keep an eye on both news about the Yemeni Houthis blocking oil exports from Saudi Arabia and rumors that mediators have proposed a 10-day ceasefire to Iran to return to the June 17 agreement.
At the same time, traders should keep a close eye on the upcoming ECB meeting. A decision to leave the deposit rate unchanged, coupled with hawkish guidance from Christine Lagarde, could provide fresh support for the euro.
Weekly Trading Plan for EUR/USD
Against this backdrop, the EUR/USD pair is likely to remain in consolidation. The preferred strategy remains unchanged: sell the euro on rallies toward the upper boundary of the 1.1370–1.1470 range and buy on pullbacks toward the lower boundary.
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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