The Fed’s hawkish shift in September prompted investors to look past negative factors such as the massive US budget deficit, political risks, and Treasury interventions in the currency and debt markets. Let’s examine the current landscape and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- The US and Iran cannot find common ground.
- The rally in Brent crude is helping the US dollar.
- The Fed’s hawkish shift has boosted the greenback.
- Short positions can be considered if the EUR/USD pair fails to break through 1.14.
Weekly Fundamental Forecast for Dollar
After posting its strongest two-week rally in six months and reaching its highest level since July, the greenback is opening the week with a gap-up amid a surge in Brent crude prices. The move was triggered by Iran’s statement that it was unwilling to soften its demands over the reopening of the Strait of Hormuz, following Donald Trump’s rejection of a proposed seven-day ceasefire. The agreement would have lifted the US military blockade of Iranian ports and allowed Tehran to resume oil exports.
Oil is the key here. The surge in Brent prices directly threatens to spur US consumer prices, presenting the Fed with several new challenges at once. How quickly will second-round effects feed into core inflation? Could elevated inflation become the new normal? These questions leave the Fed with little room for complacency. The central bank may be forced to respond—and potentially respond aggressively. Its hawkish shift in September has breathed new life into the previously battered US dollar, prompting speculators to abandon their plans to unwind long-dollar positions. Instead, those positions are beginning to build again.
Speculative Positions on US Dollar
Source: Bloomberg.
The Fed’s aggressive monetary tightening is overshadowing all the negative factors affecting the greenback, such as the massive US budget deficit, political risk, and Treasury interventions in the debt and currency markets. As a result, Morgan Stanley has withdrawn its recommendation to buy the EUR/USD pair and believes that the major currency pair will continue to fall in 2027. This is partly due to the euro’s vulnerability stemming from the French elections. Germany and Italy are also hot spots.
France-Germany Yield Spread
Source: Bloomberg.
Elevated oil prices, inflation concerns, and the Fed’s aggressive monetary tightening are driving Treasury yields higher and supporting the US dollar by increasing the appeal of US assets. Yields on 10-year Treasuries have risen for the fourth consecutive week and reached their highest level since 2007. Yields on 2-year Treasuries have been rising for six consecutive weeks, reaching their highest level since 2004.
As a result, the specter of a yield-curve inversion—which has often served as a harbinger of recession in the past—continues to hang over the market. This time, however, the backdrop is different. The US economy remains strong enough that few investors expect a recession. Instead, fueled by resilient economic growth, the AI boom, and a buoyant stock market, investors are increasingly talking about American exceptionalism. This, in turn, represents another bearish factor for the EUR/USD.
The euro may find some support from expectations of accelerating inflation in Europe, which could increase the likelihood of ECB monetary tightening in October. However, any rebound in the major currency pair is likely to be viewed as a correction.
Weekly Trading Plan for EUR/USD
The 1.1400 level remains a key resistance zone for the EUR/USD. The pair may consolidate around this level, making failed attempts to break above 1.1400 a signal for building 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.
Price chart of EURUSD in real time mode
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