The pullback in oil prices has allowed investors to shift their focus back to central banks and monetary policy. The ECB may raise rates as early as April, and the widening bond yield spread is boosting the EUR/USD pair. However, the EU central bank may repeat past mistakes. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The ECB may raise rates as early as April.
- The decline in Brent prices has helped the euro.
- The ECB’s monetary tightening is a misstep.
- A drop in EUR/USD quotes below 1.154 will give a sell signal.
Weekly US Dollar Fundamental Forecast
Some investors seek safety by moving into the US dollar, while others look to profit from widening yield spreads. Over the past week of heightened tensions in the Middle East, non-US bonds have sold off more aggressively than US Treasuries, leading to wider spreads and pressuring the greenback. At the same time, the hawkish stance of central banks has acted as a catalyst for the strongest EUR/USD rally since January.
Bond Yields in G10 Countries
Source: Bloomberg.
The Bank of England delivered the biggest surprise. Its Monetary Policy Committee voted unanimously to keep the repo rate at 3.75% while signaling readiness to act decisively against inflation. As a result, money markets shifted to pricing in a potential rate hike in 2026, whereas prior to the escalation in the Middle East, derivatives markets had expected a 50-basis-point cut.
The European Central Bank followed a similarly hawkish path. It sharply raised its 2026 inflation forecast from 1.9% to 2.6% and warned that it could rise as high as 5% under a shock scenario. The Governing Council emphasized its strong commitment to price stability. Meanwhile, remarks by Christine Lagarde about the eurozone’s solid economic footing—combined with reports of a potential rate hike as early as April—helped propel EUR/USD quotes higher.
ECB Forecasts for Economic Growth and Inflation
Source: Bloomberg.
Following the European Central Bank meeting, futures markets now price in not two, but three rounds of monetary tightening, providing additional support for the euro.
The rally in EUR/USD was also driven by a pullback in oil prices amid speculation that the US could ease sanctions on Iran, potentially releasing around 140 million barrels of supply. At the same time, Washington and Tokyo may increase sales from strategic reserves, while Jerusalem has signaled it will refrain from targeting Iran’s energy infrastructure.
However, these factors are likely to offer only temporary support to the EUR/USD pair. Saudi Arabia is reportedly bracing for a potential surge in prices toward $180 per barrel, while the reopening of the Strait of Hormuz remains highly uncertain. According to Polymarket, the probability of the Middle East conflict ending by the end of March has fallen to 5%, with odds rising to 35% by April 30 and 69% by June 30.
At the same time, the divergence in monetary policy outlooks remains critical. The strength of the US economy—and its position as a net energy exporter—gives the Federal Reserve room to maintain a steady policy stance and keep rates unchanged. In contrast, aggressive ECB tightening could place significant strain on the energy-dependent eurozone. There is a risk that the central bank repeats its 2008 mistake, when rate hikes were followed by sharp cuts amid the global financial crisis.
Weekly EURUSD Trading Plan
In this context, the surge in EUR/USD quotes driven by hawkish central bank rhetoric may prove to be a Bull Trap. If the price slides below 1.1540, short positions can be considered.
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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