The dollar strengthens: the euro has lost its chance

EUR/USD

Key zone: 1.1550 - 1.1620

Buy: 1.1650 (on strong positive fundamentals) ; target 1.1780-1.1850; StopLoss 1.1580

Sell: 1.1500 (on a pullback following a retest of 1.1600) ; target 1.1350; StopLoss 1.1570

Optimism toward the U.S. dollar has reached its highest level in more than a year. The main driver remains the ongoing conflict in the Middle East, which is boosting demand for the U.S. currency as a traditional safe-haven asset.

In theory, a confirmed peace agreement between the United States and Iran, followed by the reopening of key maritime routes, could reduce energy prices, ease inflationary pressure, and diminish the need for further tightening by central banks. In such a scenario, the dollar could partially lose ground, while the euro could gain an opportunity to recover.

However, markets do not believe Trump's expectations of a rapid end to the conflict. Geopolitical uncertainty remains, and with it, expectations of a more hawkish Federal Reserve policy continue to strengthen.

Investors are increasingly pricing in the probability of another interest rate hike in the United States. Over the past month, these expectations have risen noticeably. Against the backdrop of the Fed’s “higher for longer” strategy and a significantly higher benchmark rate compared with Europe, the dollar continues to maintain a strong advantage.

Reminder:

The ECB raised its key interest rates by 25 basis points. This was the first increase in the past three years following a prolonged period of ultra-loose monetary policy. The deposit rate now stands at 2.25%, while the main refinancing rate has been increased to 2.4%. ECB President Christine Lagarde explicitly identified energy inflation as one of the key reasons behind this decision.

However, this step has done little to narrow the gap between European and U.S. monetary policy. Both regulators are tightening financial conditions, but the Fed began this process much earlier, from significantly higher levels, and still retains room for additional rate increases. The ECB has considerably less flexibility.

It is precisely this persistent interest-rate differential that continues to serve as the primary obstacle to euro appreciation.

Several additional factors are also creating pressure:

• The ECB has been forced to acknowledge that inflationary pressure has long since expanded beyond the energy sector and is gradually spreading to other parts of the economy.
• The World Bank lowered its global economic growth forecast to 2.5%, the weakest level since the 2020 pandemic.
• High oil prices continue to filter into all categories of expenses. Moreover, one of the new sources of inflation has become AI technologies: software and computer components have risen by a record 14.5% year-over-year.
• Rapid growth in demand for AI-related equipment is further supporting exports from China and South Korea, which indirectly pressures the European economy and the euro.

At the same time, governments and central banks are gradually losing room to maneuver. Years of cheap money and large budget deficits have nearly exhausted the previous flexibility of monetary policy.

The Middle East conflict is only worsening the situation, pushing the global economy toward a classic stagflation scenario, where economic growth slows while inflation accelerates simultaneously.

Under such conditions, even obvious solutions cease to be effective. Central banks can no longer simply cut rates to support economic growth because they are forced to maintain strict control over inflation.

And what is the result?

For now, the market remains cautiously optimistic. Negotiations between the United States and Iran are temporarily supporting investors’ risk appetite: the S&P 500 Index is trading only about 2% below its all-time highs.

Some analysts are counting on a new impulse for a global stock market rally, including European exchanges. The assumption is that lower energy prices could ease inflationary pressure and reduce the need for further Fed tightening.

However, it is still premature to speak about a full-scale reversal until sustainable trading signals emerge.

Despite the positive start to the week, the euro remains under pressure against the U.S. dollar. The main reason remains unchanged: the monetary policies of the Fed and the ECB continue to diverge both in pace and in the potential trajectory of future actions.

As long as the Fed maintains a more hawkish stance, the dollar will retain its dominant position in the foreign exchange market.

Investors' attention will now focus on statements from the new Federal Reserve Chair Kevin Warsh, whose comments will largely determine future rate expectations and the direction of the EUR/USD pair.

So we act wisely and avoid unnecessary risks.

Profits to y’all!