Oil prices have stabilized, the S&P 500 is rising, and the market is awaiting signals from the ECB on interest rate hikes. As a result, the EUR/USD pair has increased. However, fundamental factors suggest that the upswing is unlikely to endure. Let’s discuss this and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The S&P 500 rally is providing support to the EUR/USD pair.
- The Fed is facing growing internal dissent.
- Oil prices could rise further amid tensions in the Strait of Hormuz.
- Short trades on the EUR/USD pair can be considered on pullbacks to 1.1540 and 1.1590.
Weekly US Dollar Fundamental Forecast
As oil prices stabilized following reports that Iraq had resumed exports via Turkey, investors shifted their focus back to traditional market drivers — namely, monetary policy divergence and US equity performance. The rally in the S&P 500 signals improving global risk appetite and puts pressure on the US dollar as a safe-haven asset. Another factor supporting the rebound in EUR/USD was the closing of short positions ahead of the Fed meeting.
Since the outbreak of the Middle East conflict, Iraq’s oil production has fallen from 4.4 million bpd to 1.4 million bpd. Baghdad was desperately seeking export alternatives. As soon as it found them, the oil market sighed with relief. Brent gained support from the IEA’s statement regarding its readiness to increase sales from strategic reserves from 400 million to 1.4 billion barrels, as well as Donald Trump’s remarks about the US military’s progress in countering Iran’s actions targeting the Strait of Hormuz.
However, the truth cannot be ignored. About two tankers pass through the planet’s main oil lifeline every day, compared to 100 in peacetime. A full recovery in shipping activity is likely to take weeks and will depend on improved security conditions, including mitigating risks such as mines, small assault vessels, submarines, and drones.
Correlation Between US Dollar and S&P 500 Index
Source: Bloomberg.
The initial flight to the US dollar at the onset of the Middle East conflict pushed the correlation between the greenback and US equities to its highest level since early 2025. As a result, the rebound in the S&P 500 on the back of positive news from companies such as NVIDIA and other tech firms has pushed EUR/USD quotes higher.
However, the longer the standoff between the US, Israel, and Iran persists, the greater the risk of stagflation and a broader global economic slowdown. This scenario could bring sellers back into the S&P 500, deepen the correction, and weaken overall risk, ultimately supporting renewed strength in the US dollar. As a result, bullish bets on the US dollar are surging, with 1-month risk reversals for the dollar spot index continuing to surge.
US Dollar Risk Reversals
Source: Bloomberg.
Traders are playing it safe by closing their short positions on the EUR/USD pair ahead of the Fed and ECB meetings. The latter has given a clear signal that it will not allow a repeat of what happened in 2022, when it waited too long to raise rates to combat inflation. Signals from the Fed, however, may well turn out to be dovish. Three FOMC members are likely to vote for monetary policy easing, which will be reflected in the forecasts.
Weekly EURUSD Trading Plan
In fact, raising rates at this stage may not be optimal. The ECB may repeat the policy mistake it made in 2008. Combined with a renewed rally in Brent crude, this suggests that the downtrend in the EUR/USD pair is likely to resume. In this connection, short positions can be considered if the price tests 1.154 and returns below this level or rebounds from 1.159.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
