While Brent was trading in the $80–90 per barrel range, the divergence in monetary policy worked in favor of Brent bulls. However, everything changed after Iran seized a tanker in the Strait of Hormuz. Let’s examine the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Rising geopolitical risks have boosted the US dollar.
- Monetary policy divergence is supporting the EUR/USD.
- The rally in Treasury yields is dampening risk appetite.
- Short positions on the EUR/USD can be considered if the price slides below 1.156.
Weekly Fundamental Forecast for Dollar
Peace can sometimes be more dangerous than war. For a ruling regime, that can become increasingly true as a conflict drags on. If Donald Trump wants to extricate himself from the conflict while saving face, Iran may have little interest in letting him do so. The seizure of a tanker in the Strait of Hormuz, combined with increased activity by the Tehran-backed Houthis in the Red Sea, pushed Brent crude above its previous $80–90 per barrel range and put pressure on EUR/USD quotes.
As oil prices consolidated, monetary policy took center stage. A series of disappointing US economic reports reduced the odds of a Fed rate hike in September from 50% to 31%. The futures market had priced in a 21-basis-point increase in the federal funds rate by the end of 2026, although it had previously been fully confident that such a move would occur. By contrast, the probability of an ECB rate hike in early autumn stood at 84%, with markets pricing in a cumulative increase of 38 basis points by the end of December. This divergence favored EUR/USD bulls until Brent surged above $91 per barrel.
Government Bond Yields
Source: Bloomberg.
As a result, yields on 30-year US Treasury bonds have surged to their highest levels in nearly two decades. It is no longer a question of whether yields on comparable foreign bonds are rising faster or slower. Before the latest escalation in the Middle East, markets expected the Fed to lag behind other central banks as they moved toward tighter policy. That dynamic has now changed, giving the US dollar an opportunity to regain ground.
Iran seized a tanker in the Strait of Hormuz, allegedly because it had refused to pay transit fees. Meanwhile, Donald Trump has threatened to “bomb Oman to the ground” over what he describes as its duplicity. He accuses the country of siding with Iran and seeking to strengthen Tehran’s control over the world’s most important oil supply route.
US Strategic Oil Reserve
Source: Wall Street Journal.
Meanwhile, US strategic oil reserves have fallen to their lowest level since 1982, reminding us that the market is like a coiled spring. The longer the conflict in the Middle East continues, the greater the risk that Brent crude could surge above $100 per barrel. Such a move would heighten the risk of accelerating inflation and prompt the Fed to pursue tighter monetary policy. That, in turn, would provide further support for the US dollar.
The case for a stronger dollar becomes even more compelling because rising Treasury yields could eventually trigger a correction in the S&P 500, dampen global risk appetite, and boost demand for the greenback as a safe-haven asset.
Weekly Trading Plan for EUR/USD
As expected, the EUR/USD is consolidating amid geopolitical uncertainty. The forecast calling for a trading range of 1.147–1.160 has proved accurate. As a result, range-trading strategies should be adopted: sell near the upper boundary and buy near the lower one. If the price drops below 1.156, it would provide an opportunity to add to the short positions in the euro opened at 1.160.
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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