A glimmer of hope for de-escalation in the Middle East, combined with a slowdown in US hiring and neutral rhetoric from FOMC officials, has allowed the EUR/USD pair to regain its footing. However, can the rebound last? Let’s examine the outlook and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Falling oil prices and lower Treasury yields have supported the euro.
- The Fed may not raise interest rates in September.
- US private-sector employment data came in weaker than expected.
- A pullback from 1.1615 and 1.1635 could provide an opportunity to sell the EUR/USD.
Weekly Fundamental Forecast for Dollar
A single remark from Donald Trump helped save the EUR/USD pair. The US president said that the airstrikes on Iran would be brief. That was enough to trigger a pullback in oil prices, which in turn pushed Treasury yields lower and reduced the probability of a Fed rate hike in September from 70% to 62%. Disappointing economic data and neutral rhetoric from FOMC officials added further fuel to the US dollar’s retreat.
New York Fed President John Williams sees no need to raise the federal funds rate in September, as he sees no evidence of second-round effects on inflation. According to the Fed official, factors such as tariffs and geopolitical tensions are temporary. Combined with ADP’s modest private-sector employment growth of just 38,000 jobs in August, this dovish rhetoric allowed bulls to push the EUR/USD pair higher.
Euro/Dollar Risk Reversals
Source: Bloomberg.
After nine consecutive days of declining euro reversal risks—the longest such streak since 2017—hopes for stabilization in the Middle East provided a much-needed breath of fresh air for the EUR/USD pair. However, the underlying problem has not gone away. No matter how much Donald Trump talks about a swift end to the conflict, the buildup of US military forces in the region suggests otherwise. Moreover, Europe has embarked on a risky course that could further undermine its currency.
Repeated assurances from the US administration that the conflict in the Middle East would be short-lived allowed Brussels to postpone its natural gas purchases. The strategy was based on expectations of a peace agreement that would reopen the Strait of Hormuz and bring energy prices back down. Those expectations have failed to materialize, leaving Europe in an increasingly difficult position. Natural gas storage facilities are now only 65% full—the lowest level in 15 years—while prices have surged to their highest levels since early 2023. Depleted inventories and elevated energy costs pose another significant headwind for the euro, particularly if the Middle East conflict drags on.
Natural Gas Storage Fill Rates in Europe
Source: Wall Street Journal.
The situation is painfully reminiscent of 2022, when the energy crisis sent the euro below parity with the US dollar. Looming political crises in France and Germany are adding further pressure to the EUR/USD pair.
The only factor that could potentially save the major currency pair is the Fed’s reluctance to raise interest rates at its September 15–16 meeting. Such a decision would come as a major surprise to markets, which have become increasingly convinced that monetary tightening is on the horizon. The US August jobs report could play a crucial role in shaping the central bank’s decision. In the meantime, with the report just around the corner, the risk of consolidation in the EUR/USD pair is increasing.
Weekly Trading Plan for EUR/USD
The conflict in the Middle East is unlikely to de-escalate anytime soon. Against this backdrop, it may make sense to stay on the sidelines or consider selling the euro on pullbacks from 1.1615 and 1.1635, or if the pair fails to reclaim the 1.1600 level.
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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