The easing of geopolitical tensions has done little to diminish investor demand for the US dollar. The greenback continues to benefit from diverging monetary policy paths on either side of the Atlantic. While the Fed could deliver three rate hikes in 2026, the ECB is expected to tighten policy only once. Against this backdrop, let’s examine the market dynamics and develop a trading strategy for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Fed may raise rates to 4.5% in 2026.
- The likelihood of ECB monetary tightening is declining.
- The interest rate spread favors the US dollar.
- Long positions on the EUR/USD pair can be considered amid strong PMI data.
Weekly Fundamental Forecast for Dollar
When the US resumed bombing Iran in early June, the US dollar did not rise as a safe-haven currency. Now it shows no signs of falling, despite the peace agreement, progress in the nuclear talks, increased traffic through the Strait of Hormuz, and a drop in oil prices. Investors may well be remaining cautious, given the numerous setbacks in the dialogue between Washington and Tehran. However, the root of the problem actually runs much deeper.
Whatever events unfold in the global economy, they should be viewed through the lens of monetary policy. During the conflict in the Middle East, the likelihood of the ECB tightening monetary policy rose sharply, as rising Brent prices could have significantly fueled inflation in this net oil-importing region. In contrast, the futures market expected the Fed to keep the federal funds rate unchanged in 2026.
Probability of Three Rate Hikes by Fed
Source: Wall Street Journal.
Following Kevin Warsh’s hawkish surprise, the market narrative shifted dramatically. CME derivatives now assign roughly even odds to two Fed rate hikes in 2026, while Bank of America expects as many as three increases. The rationale is straightforward: the US economy remains remarkably resilient, and the Fed appears committed to a more aggressive stance against inflation. Meanwhile, the decline in Brent crude prices has weakened the ECB’s primary argument for further monetary tightening. As a result, investors are increasingly skeptical that the European Central Bank will deliver another rate hike this year after raising its deposit rate from 2.0% to 2.25% in June.
The EUR/USD pair is falling due to diverging monetary policies, as the yield spread between US and German bonds widens. This boosts the appeal of US assets and prompts capital outflows from Europe to North America. Only a slowdown in US consumer prices could support the major currency pair, confirming the US administration’s view that inflation is temporary.
According to Chicago Fed President Austan Goolsbee, the Fed must determine whether temporary shocks—such as tariffs and higher oil prices resulting from the conflict in the Middle East—are the sole drivers of the recent acceleration in CPI. The Fed official highlighted rising services inflation as a particular concern. If elevated inflation becomes entrenched in the US economy, the central bank may have little choice but to raise interest rates further. Such a scenario would provide additional support for the US dollar.
Weekly Trading Plan for EUR/USD
Against this backdrop, the EUR/USD pair needs to reclaim the 1.1455 level in the near term to avoid a decline toward 1.1350. Strong eurozone PMIs could provide the catalyst for a recovery, increasing the likelihood that the ECB will deliver another rate hike.
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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