The massive hawkish move by Fed counterparts could have knocked the US dollar off the rails, but the US currency managed to weather the storm. Their rhetoric may ultimately prove to be little more than empty words, as further rate hikes carry significant risks. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Speculators have become net buyers of the US dollar.
- The conflict in the Middle East is supporting the greenback.
- Central banks cannot stem the rise of the USD index.
- Short positions can be considered if the EUR/USD pair breaks through 1.1525.
Weekly US Dollar Fundamental Forecast
Actions speak louder than words. No matter how strongly central banks signal further rate hikes, they may ultimately refrain from following through. In the meantime, hawkish rhetoric tends to push local bond yields higher and support domestic currencies. Currency appreciation can help curb inflation. The recent surge in EUR/USD quotes following the ECB meeting appears to be little more than a Dead Cat Bounce, a well-known pattern in technical analysis that typically precedes the continuation of the prevailing trend.
Meanwhile, hedge funds and asset managers have turned net buyers of the US dollar for the first time since December. Since 2019, the United States has been a net exporter of energy commodities, and the greenback continues to benefit from geopolitical tensions in the Middle East, reinforcing its role as a safe-haven asset.
Speculative Positions on US Dollar
Source: Bloomberg.
At the same time, the US dollar index remains undervalued. Historical comparisons highlight this divergence: following the Russia–Ukraine crisis, oil prices rose by 32% within three months, while the US dollar gained 15% over the subsequent two months. The current situation looks markedly different. Since the outbreak of hostilities involving Iran, Brent crude has surged by 56%, yet the greenback has appreciated by only 2%. This discrepancy suggests that EUR/USD may still have room to move lower.
Central banks have attempted to throw a curveball at the US dollar. Australia has raised rates, Japan has signaled a potential hike, the UK has indicated that further monetary tightening is likely, and both Canada and the eurozone have left the door open for additional increases. As a result, global bond yields have been rising faster than US yields, putting pressure on the dollar.
However, rhetoric alone carries little weight. The US economy remains uniquely resilient and capable of withstanding higher interest rates, giving the Federal Reserve greater flexibility. Other central banks face far tighter constraints. At the same time, the Fed itself may still be forced to act—not only due to persistent inflation that remains reluctant to return to the 2% target, but also because of the growing risk of renewed price pressures driven by the conflict in Iran.
Real and Nominal Interest Rates
Source: Wall Street Journal.
The key factor lies in real interest rates, which are crucial for the broader economy. If CPI and PPI continue to rise, real rates will decline, increasing the likelihood that the Fed will tighten monetary policy.
Against this backdrop, the futures market has adjusted its expectations. The probability of a federal funds rate cut in 2026 has dropped from 72% at the start of the year to 37%, while the odds of a rate hike have increased from 11% to 45%.
Likelihood of Change in Fed’s Interest Rate
Source: Wall Street Journal.
This suggests that as long as the conflict in the Middle East persists and the Strait of Hormuz remains closed, the US dollar is likely to retain further upside potential. Market participants appear to recognize this dynamic, with speculators increasing their long positions in the greenback. Meanwhile, central banks have only managed to exert temporary pressure on the USD index. In the current environment, their policy options remain limited.
Weekly EURUSD Trading Plan
Short positions opened at 1.159 have proven to be a sound strategy. A confirmed break below 1.1525 would create an opportunity to form more short positions.
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.
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