It would seem that the dollar has everything going its way. Inflation in the US has accelerated to 4.2%, keeping the likelihood of a Fed rate hike elevated. Geopolitical risks are mounting, while global risk appetite is waning. Why is the greenback not strengthening? Let’s analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US has launched new airstrikes across Iran.
- Inflation has surged to a three-year high.
- Oil and the dollar are not soaring.
- Long positions on the EUR/USD pair can be considered if the price breaks through 1.1570.
Weekly Fundamental Forecast for Dollar
The US continues to attack Iran, yet the markets’ reaction is surprising. Stock indices, which previously showed little sensitivity to geopolitics, are suffering the most. In contrast, the oil and currency markets are relatively calm. After all, it was precisely these markets that previously reacted sharply to events in the Middle East. Brent barely rose in response to the escalation, which helps maintain consolidation in the EUR/USD pair.
Markets largely ignored the release of US inflation data. However, consumer prices in May surged to 4.2%—a level not seen since April 2023. In fact, both the CPI and the core index met forecasts on an annual basis but fell short of them on a monthly basis. This suggests that a peak has been reached. Looking ahead, inflation may begin to ease as oil prices decline from their April highs.
US Inflation
Source: Wall Street Journal.
Moreover, the latest news from the Middle East carries more weight than the data. Donald Trump’s statements that Iran is taking the US for fools and will pay the price for dragging out negotiations—followed by airstrikes on Iranian territory—should have sent Brent and the US dollar soaring. In fact, both assets saw only modest gains.
The oil market is experiencing the same process as in 2022—adaptation. Four years ago, Russia found workarounds to avoid sanctions. This contributed to a 50% drop in Brent prices from their March peak over 12 months. Today, Brent has retreated 20% from its extremes thanks to alternative routes from Gulf countries, increased capacity in the Strait of Hormuz, record US exports, and a reduction in Chinese imports to 7.8 million bpd—nearly 4 million bpd less than the 2015 average.
Market Expectations for Fed Rate Hike
Source: Bloomberg.
Oil’s muted response to geopolitical tensions gives Donald Trump greater room to maneuver. The United States can continue its military operations against Iran without facing an immediate surge in inflation. If this dynamic persists, expectations in the futures market could shift. Currently, the derivatives market is pricing in a 25-basis-point increase in the federal funds rate in 2026, but any downward revision to these expectations could create favorable conditions for a EUR/USD rally.
Meanwhile, the euro is supported by the ECB’s willingness to act decisively. Markets view a rate hike in June, potentially followed by further tightening, as a more appropriate response than inaction. Remaining on the sidelines risks allowing inflationary pressures to become entrenched.
Weekly Trading Plan for EUR/USD
The US dollar’s inability to gain traction despite escalating tensions in the Middle East and declining stock markets supports buying the EUR/USD at 1.1570. When a market fails to move in line with prevailing fundamentals, the likelihood of a reversal tends to increase.
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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