The EUR/USD pair has fallen due to diverging monetary policies, but the resumption of the conflict between the US and Iran could accelerate its decline. Demand for the US dollar as a safe-haven asset is likely to increase. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Iran intends to exercise sole control over the Strait of Hormuz.
- An escalation of the conflict benefits the US dollar.
- Slowing inflation is limiting the ECB’s options.
- Short trades on the EUR/USD can be opened below 1.1355.
Weekly Fundamental Forecast for Dollar
At the beginning of the year, the outlook for the euro looked bright. The eurozone economy proved resilient to US tariffs and was recovering quickly. At the same time, weakness in the labor market and the fact that import duties proved less inflationary than expected gave the Fed grounds to cut rates. Bloomberg forecast the EUR/USD pair to end 2026 at 1.2. Six months later, an increasing number of major banks have revised their forecasts to 1.1.
The conflict in the Middle East and the Fed’s hawkish pivot dealt another blow to the euro. Rising energy prices for a heavily import-dependent region are clearly negative for its currency. At the same time, Kevin Warsh’s firm commitment to bringing inflation back to target has significantly strengthened the US dollar. Perhaps the markets got ahead of themselves in anticipating two Fed rate hikes in 2026, but the escalation of the conflict in the Middle East could push the EUR/USD pair even lower, as the risks of a reversal clearly suggest.
Euro/Dollar Risk Reversals
Source: Bloomberg.
Iran is once again attacking tankers in the Strait of Hormuz, and when the US responds with airstrikes, Tehran accuses it of violating the ceasefire and launches missiles at Gulf states. Withdrawal of sanctions is not enough for Iran; it claims sole control over the most important oil supply route, and that no other country has any authority in this matter.
The biggest mystery is the drop in oil prices. From its March peak, Brent has plummeted by nearly 40% and has shown no reaction to the escalation of the conflict in the Middle East. Apparently, the situation was smoothed over during the weekend. Axios reported a ceasefire and negotiations between the US and Iran, while the US government announced the resumption of traffic through the Strait of Hormuz. The fact that the US attacks began after the stock market closed suggests an intention to contain economic damage.
Eurozone Inflation
Source: Bloomberg.
However, will pre-war transit flows and the damaged infrastructure in the Gulf states manage to recover quickly? It was these factors that pushed Brent prices lower. At the same time, the likelihood that European inflation had peaked was increasing. In June, CPI is expected to slow from 3.2% to 3%, allowing the ECB to proceed cautiously with another rate hike, as Christine Lagarde has suggested.
Weekly Trading Plan for EUR/USD
Low oil prices give Donald Trump greater flexibility to escalate the conflict in the Middle East. This could reignite demand for the US dollar as a safe-haven currency, increasing the risk of a sell-off in the EUR/USD pair if the price falls below the support level of 1.1355. However, if tensions in the region do not escalate further, EUR/USD quotes may enter a consolidation phase ahead of the release of key US labor market data.
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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