As soon as oil prices retreated slightly, the EUR/USD pair started to recover. Various central bank statements are fueling the rebound. While the Fed needs to reassure markets that it will not remain on the sidelines, the ECB is ready to increase interest rates. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Inflation expectations remain relatively stable.
- The Fed may cut rates in June and September.
- The ECB is ready to step in if inflationary pressures persist.
- Pullbacks from 1.15, 1.154, and 1.159 may offer selling opportunities.
Weekly US Dollar Fundamental Forecast
As the conflict in the Middle East escalated, investors feared that the global economy would face a recession or stagflation due to the largest oil crisis in history, according to the IEA. They believed Donald Trump had no viable solutions, and that the 95% reduction in cargo traffic through the Strait of Hormuz would drag on until nearly May, driving Brent prices up to $145 per barrel. However, as is often the case, emotions obscure the facts, and the reality is not as dire as it appears at first glance.
Goldman Sachs notes that a repeat of the 2022 inflation surge is unlikely. At that time, price pressures were driven both by the spike in Brent Crude Oil following the conflict in Ukraine and the lingering effects of the pandemic. By contrast, the Middle East accounts for only about 1% of global non-energy exports, while China—which was heavily impacted by the pandemic—represents roughly 20%. Against this backdrop, inflation expectations remain relatively contained despite the recent oil rally. The situation today differs markedly from that of four years ago.
Brent Price and Inflation Expectations
Source: Bloomberg.
Morgan Stanley agrees with this view; despite the rapid rise in Brent prices, it believes that the Fed will cut rates in June and September. Donald Trump urged the US regulator to take action “right this second” and called for a special FOMC meeting. The US leader argues that even a third grader knows that monetary policy needs to be loosened.
While such calls highlight the political pressure on policymakers, the Fed is more likely to take a balanced approach. With market expectations for no rate cuts in 2026, the central bank may seek to reassure investors through updated FOMC projections and more dovish communication.
Market Expectations for Fed Interest Rate
Source: Wall Street Journal.
Meanwhile, the European Central Bank is determined to avoid a repeat of 2022, when it was slow to tighten monetary policy, allowing inflation to rise to record levels.
However, there is another side to the story. In 2007–2008, Frankfurt responded to surging oil prices by raising interest rates, only to reverse course aggressively—cutting rates by 325 basis points—as the eurozone proved unable to withstand the burden of elevated borrowing costs. This episode is often seen as one of the ECB’s most significant policy missteps.
In this context, the recent rise in EUR/USD quotes appears to reflect a combination of easing oil prices and expectations of diverging central bank signals: the Fed may adopt a more dovish tone, while the ECB is likely to maintain a hawkish stance.
Weekly EURUSD Trading Plan
As a result, the euro may strengthen in the short term. Without an end to the conflict in the Middle East, Brent prices are unlikely to decline. Therefore, a pullback in the EUR/USD pair from resistance levels of 1.15, 1.154, and 1.159 may offer selling opportunities.
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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