The odds seemed stacked against the euro. The ECB did little to support the EUR/USD pair, while the conflict in the Middle East and fresh US tariffs boosted demand for the US dollar. But as tensions began to ease, the narrative quickly shifted. Let’s examine the key drivers and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The de-escalation of the US-Iran conflict has saved the euro.
- White House tariffs lose their impact.
- The return of the TACO trade is weighing on the US dollar.
- Consider holding long trades on the EURUSD pair opened at 1.137.
Weekly Euro Fundamental Forecast
Only a de-escalation in the Middle East could give the euro a lifeline. The previous week ended firmly in favor of EUR/USD bears, as geopolitical tensions and fresh US tariffs stoked inflation concerns and strengthened expectations that the Fed would raise interest rates. However, the pair opened the final trading week of July with a bullish gap. The reason is simple: the US is running short of munitions. And despite the White House insisting that Donald Trump is keeping all options on the table, there are few good ones left.
Weekly US dollar Performance
Source: Bloomberg.
Tariffs are no longer the main concern. Eighteen months after the biggest wave of US import tariffs since the 1930s, it has become clear that they have neither derailed the US economy nor triggered a surge in inflation. At the same time, Donald Trump has fallen short of his goal of narrowing the trade deficit. Against this backdrop, the replacement of temporary tariffs with permanent ones at rates of 10–12.5% barely caught the market’s attention.
There are, however, reasons for caution. Frustrated by the EU’s hefty fines on US tech companies, the Trump administration has threatened to impose steep new tariffs on the bloc as soon as possible. While tariff-driven inflation has risen more slowly than many expected, it remains above pre-pandemic levels, particularly in the services sector. If the conflict in the Middle East drags on, the risk of another pickup in consumer prices will increase. It is therefore no surprise that expectations for tighter monetary policy at the upcoming FOMC meeting are now at their highest level since September 2024.
Market Expectations Regarding the Fed Rate
Source: Bloomberg.
According to ING, the Fed’s lack of hawkish rhetoric is likely to disappoint investors. Softer-than-expected inflation and labor market data, coupled with Kevin Warsh’s measured remarks, are unlikely to provide much support for EUR/USD bears. Even so, ING expects the US dollar to remain underpinned by geopolitical tensions in the Middle East.
The US has suspended its 13-day air campaign against Iran. Officially, Washington says Tehran’s willingness to avoid further escalation was the reason. However, according to a Wall Street Journal report, the US lacks sufficient air defense capabilities to adequately protect its bases across the Middle East.
Markets were already positioning for a de-escalation. The first indication came when Brent rose above $100 per barrel. In previous episodes, that level marked the point at which the TACO trade—short for “Trump Always Chickens Out”—started to gain traction.
Weekly EURUSD Trading Plan
Against this backdrop, EUR/USD‘s bullish gap at the start of the week came as little surprise, while long positions opened on the rebound from the lower boundary of the 1.137–1.147 trading range have already paid off. Unless Kevin Warsh delivers an unexpectedly hawkish message, the pair is unlikely to fill the gap. Recommendation: hold long trades.
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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