The US-Iran peace agreement has been signed, but a resumption of hostilities in Lebanon could lead to its termination. These fears are weighing on the EUR/USD pair. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US and Iran are threatening each other.
- Traffic in the Strait of Hormuz is increasing.
- The markets are returning to their usual drivers.
- Long trades on the EUR/USD pair can be opened on a breakout of 1.148.
Weekly Fundamental Forecast for Dollar
Iran took offense at Donald Trump’s threats to strike its territory if Tehran did not stop Hezbollah, and allegedly walked away from the nuclear talks in Switzerland. Iran declared that the peace agreement is no longer in effect and that the Strait of Hormuz remains closed. Oil prices rose, and the EUR/USD opened the week with a gap down, although all the loud statements made yesterday by the opposing sides were essentially worthless.
According to US data, traffic through the Strait of Hormuz has increased from 12.5 million to 17 million bpd. Iran has resumed operations on Kharq Island—a key part of its energy infrastructure—, and Iraq has begun increasing its oil production. Moreover, Bloomberg reported that there was no walkout from the negotiations. It seems Tehran has taken a cue from Donald Trump—he talks a lot but does not fulfill his promises.
Following an initial rally, Brent’s pullback allowed investors to return to their daily grind. Markets will be closely monitoring US macroeconomic data to determine whether their interest rate forecasts are accurate. Data on business activity, durable goods orders, GDP, and personal consumption expenditures indices will provide the necessary food for thought.
Market Expectations for Fed Rate Hike
Source: Bloomberg.
Following the June FOMC meeting, the futures market priced in a federal funds rate hike in September and raised the probability of two rounds of monetary tightening in 2026 to over 50%. This trajectory is far more aggressive than the Committee’s latest projections. Only 3 of its 18 members share the futures market’s view.
Fed and Market Forecasts for Interest Rates
Source: Bloomberg.
With geopolitics taking a back seat, investors now have the opportunity to return to the good old game: which is right, the markets or the Fed? If the markets are right, the US dollar could strengthen even further. If the central bank is right, the greenback will weaken significantly.
The Personal Consumption Expenditures (PCE) index—the Federal Reserve’s preferred inflation gauge—could provide a clue. Markets typically react to it more cautiously than to the Consumer Price Index. However, any indication that PCE inflation peaked in May could reduce expectations of a federal funds rate hike in September, potentially fueling a rally in the EUR/USD pair.
The major risk to this scenario will be the echoes of geopolitical turmoil. Talks are on edge, as evidenced by their concern over Lebanon. The slightest provocation could trigger turmoil and cause investors to flee back to the US dollar.
Weekly Trading Plan for EUR/USD
Markets hope that this scenario will not play out, and that a breakout of the 1.148 resistance level will offer an opportunity to open long positions on the EUR/USD pair. However, markets may start buying the greenback on expectations of a rise in the PCE index, only to sell it once the data is released.
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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