The return of the historical correlation between the US dollar and the VIX index suggests that the US currency should be actively sold as the US stock market shifts from fear to greed. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US has shifted from military action to economic measures.
- The US dollar has reestablished its historical correlation with the VIX.
- Divergence in monetary policy is benefiting the euro.
- Long positions can be considered as long as the EUR/USD pair trades above 1.176.
Weekly Fundamental Forecast for Dollar
Investors increasingly believe that the conflict in the Middle East has passed its peak. The US blockade of the Strait of Hormuz is seen as a shift in strategy from direct military engagement to economic pressure. At some point, both sides are expected to return to the negotiating table. Against this backdrop, Deutsche Bank has recommended selling the dollar, a view investors appear to be embracing, pushing the EUR/USD pair to its highest levels since late February.
The Middle East conflict has also helped the greenback restore its traditional correlation with the VIX. That relationship had previously broken down, as investors grew reluctant to treat the US dollar as a safe-haven asset during Donald Trump’s tariff wars, a period marked by declining confidence in the US currency.
Correlation Between US Dollar and VIX
Source: Bloomberg.
Restored correlation with the VIX, against the backdrop of the stock market’s shift from fear to greed, can mean only one thing: the US dollar is poised to plummet. FOMO is driving US stock indices to record highs, and in such conditions, safe-haven assets are the biggest losers.
However, in the medium- to long-term, a clear disconnect between exchange rates and underlying fundamentals is emerging. According to a Bank of America survey, most investors expect oil prices to exceed $80 per barrel by the end of 2026. At the same time, the International Energy Agency is signaling the first decline in global oil demand since the pandemic. Spot prices for Brent and WTI remain significantly above futures prices, pointing to ongoing market tightness. Under these conditions, the eurozone—highly dependent on energy imports—is likely to suffer more than the US economy. Against the backdrop of developments in the Middle East, the International Monetary Fund is expected to lower its GDP growth forecast for the currency bloc by 0.2 percentage points.
Oil Prices on Spot and Futures Markets
Source: Wall Street Journal.
The stronger an economy, the higher the interest rates it can sustain. The more attractive its assets become, the greater the inflow of investment capital—and, in turn, the stronger its currency. Over time, these relationships should be reflected in the EUR/USD exchange rate. For now, however, the pair’s upward momentum appears to be driven largely by fear of missing out, but that is not the only factor at play.
The derivatives market is pricing in a 34% probability of a 25-basis-point cut in the federal funds rate, while the ECB’s deposit rate is expected to rise by 50 basis points in 2026, with a 30% chance of a 75-basis-point increase. A narrowing of the rate differential should, in theory, boost EUR/USD quotes. However, this logic may be flawed. The European Central Bank is unlikely to tighten monetary policy as markets anticipate. Once investors reassess their expectations, the euro’s rally could be undermined.
Weekly Trading Plan for EUR/USD
Meanwhile, while sentiment and FOMO continue to drive the Forex market, fundamental factors remain on the sidelines. The markets will think about them later. For now, as long as the EUR/USD pair holds above 1.176, the outlook remains bullish, with buying opportunities still in play.
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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