The escalation of the conflict in the Middle East, the rally in Brent crude, and the associated increase in the likelihood of a Fed rate hike are supporting EUR/USD bears. Likewise, the Fed’s hawkish rhetoric is helping them. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed is considering raising interest rates.
- The US and Iran cannot agree on the Strait of Hormuz.
- Inflation will determine the dollar’s fate.
- Strong CPI data will present an opportunity to sell the euro with a target of 1.13.
Daily Fundamental Forecast for Dollar
If Kevin Warsh remains silent, the markets will start listening to other Fed officials. For example, Christopher Waller hinted at rate cuts in the second half of 2025—which ultimately happened. Now, the FOMC official is discussing tightening monetary policy. Coupled with the escalation of the conflict in the Middle East, these factors are driving EUR/USD quotes down.
It is difficult to negotiate with a country whose leadership cannot reach a consensus even within its own ranks. Iranian diplomats have reportedly told mediators they are prepared to resume talks with the United States, but their room for maneuver is limited. The Islamic Revolutionary Guard Corps remains firmly opposed to negotiations, recognizing only the language of force—a message that appears to have resonated in the US.
Donald Trump has stated that the US will act as the guarantor of security in the Strait of Hormuz and has called for a 20% fee for providing that protection. Brent crude responded with its sharpest rally since the pandemic, reviving fears that inflation could once again accelerate beyond policymakers’ control.
Market Expectations for Fed Rate
Source: Bloomberg.
Christopher Waller argued that an interest rate hike should remain on the table as early as July, particularly if the June CPI report points to further acceleration in core inflation. In his view, inflationary pressures are building regardless of the measure used, leaving little reason to delay policy action. Following his hawkish remarks, market-implied odds of a rate hike at the next FOMC meeting jumped to 42%, up from just 18% at the beginning of the month.
Escalating tensions in the Middle East, surging Brent crude prices, and increasingly hawkish Fed rhetoric form a powerful combination that few currencies can withstand against the US dollar.
Foreign Investments in US Stocks
Source: Bloomberg.
What could stand in the way of further US dollar strength? According to Apollo Global Management, one potential risk is an outflow of foreign capital triggered by a deeper sell-off in AI-related stocks. The argument is that the AI boom attracted substantial foreign investment into the US equity market, much of which was left unhedged due to high US interest rates. A rotation out of Big Tech could therefore prompt capital repatriation, weighing on the US dollar index.
That argument, however, appears unconvincing. Investors do not need to abandon the US equity market altogether—they can simply rotate into other sectors, as many domestic investors already are. Under current conditions, geopolitical tensions and the growing risk of further Fed tightening remain far more powerful drivers of the dollar’s strength.
Daily Trading Plan for EUR/USD
The market is poised to look beyond the headline figures in the June inflation report. Although annual inflation is expected to moderate, an acceleration in the monthly core CPI could push the EUR/USD pair toward the 1.130 target. Conversely, a softer-than-expected inflation reading would create an opportunity to buy the euro near the lower boundary of the 1.137–1.147 consolidation range.
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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