The tensions in the Middle East are boosting the US dollar. It is outperforming the yen and the euro as a safe-haven currency amid rising oil prices. This is not the only driver of the EUR/USD pair’s decline. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Donald Trump’s agenda is pushing the EUR/USD pair down.
- The Fed’s doves are revising their views.
- Geopolitical factors are supporting the US dollar.
- Short positions on the EUR/USD pair can be opened with targets of 1.171 and 1.168.
Weekly US Dollar Fundamental Forecast
What is helping the US dollar more, the conflict in the Middle East or the fact that Donald Trump has little time? Trump won the 2024 election thanks to his promises to improve the US economy. However, at the beginning of his second year in office, he is focusing on Russia, Venezuela, Greenland, Iran, and Cuba. The US leader does not have time for threats against the Fed and plans to weaken the greenback. This is good news for EUR/USD bears.
While Donald Trump is busy, even his loyal followers are starting to drift away. FOMC Governor Stephen Miran said that the US labor market had improved and that commodity prices were more stable. This allows him to adjust his expectations about the fate of the federal funds rate. While in December he predicted a drop to 2.25% by the end of 2026, he now limits himself to 2.75% or 100 basis points.
If the Fed’s chief dove has tempered his appetite, what can be said about the rest? The futures market reduced its expectations for a sharp cut in the federal funds rate in June from 62% to 59%, which, combined with a decline in the number of unemployment claims to 206,000, pushed EUR/USD quotes down.
US Unemployment Claims
Source: Bloomberg.
The decline of the main currency pair is driven not only by macroeconomic data and monetary policy, but also by geopolitical factors. Against this backdrop, speculators who have built up net short positions in the US dollar to maximum levels since June are forced to actively close them. Investors are concerned about US military deployments in the Middle East reaching their highest levels since the US invasion of Iraq in 2003. Donald Trump is considering a preemptive strike against Iran, which would push oil prices even higher.
Speculative Positions on US Dollar
Source: Bloomberg.
In such conditions, the euro and yen become less attractive as safe-haven currencies. Both Europe and Japan are net oil importers. Rising oil prices will hurt their economies. The US, as a net energy exporter, will benefit from this situation.
Therefore, Donald Trump’s focus on international affairs, the lack of pressure from the president on the Fed, the adjustment of the FOMC doves’ views towards less aggressive monetary expansion, strong macro statistics, and, finally, the growth of geopolitical risks in the Middle East provide a solid foundation for the EUR/USD pair’s downward trend.
Weekly EURUSD Trading Plan
Will data on European business activity and US GDP change anything? Not significantly, I believe. Most likely, traders will have an opportunity to sell the EUR/USD pair on the rise and thus increase their short positions on the euro against the US dollar, which were formed at 1.1845. The initial targets are 1.171 and 1.168.
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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