- Despite bounce, EUR/USD forecast remains fragile as markets keep eye on oil prices and US inflation data
- Rising energy costs and sticky US CPI could reinforce expectations of a more hawkish Federal Reserve
- Unless there is a genuine breakthrough in Middle East tensions, EUR/USD may struggle to rise back to 1.2000
The EUR/USD started the week on shaky footing after gapping lower during the Asian session overnight, before managing to recover nicely along with everything else once Europe came online. There was little in the way of major economic data today, but markets reacted to a modest pullback in oil prices after their earlier surge. In fresh, but repeated comments, Trump today said the Iran war will be over soon after decimating Iran’s, while also reporting a positive call with Russia's Putin. The optimism is keeping the EUR/USD forecast supported, but a resolution needs to be found in the US-Iran stalemate and fast because otherwise rising oil prices will make stagflationary concerns real for the Eurozone.
Oil maintains geopolitical risk premium
So, traders are still clinging to hopes that some form of diplomatic agreement could eventually emerge between the US and Iran, even though both sides remain far apart on several key issues. So far, there is little sign of meaningful progress ahead of President Trump’s upcoming visit to China, and that uncertainty is keeping energy markets on edge. Oil prices initially jumped around 4% in Asia, yet the move failed to spark a full-scale flight to safety. That suggests investors are cautious rather than outright defensive for now.
Dollar supported as inflation concerns return
Unless an unexpected peace agreement materialises, attention is likely to shift quickly towards this week’s US inflation data. A stronger-than-expected CPI print could easily keep the dollar supported.
The US dollar has weakened slightly today but could find renewed support should hopes of a near-term Middle East breakthrough fade. President Trump described Iran’s latest proposal as “totally unacceptable”, reinforcing the view that negotiations remain stuck. Yet he continues to suggest the war will be over soon and that’s enough to keep sentiment positive.
Without significant progress soon, markets will price in elevated geopolitical risk, tighter oil supply conditions, and renewed inflation pressures globally.
From a data point of view, the key event for markets will undoubtedly be Tuesday’s US CPI release. Headline inflation is expected to accelerate to 3.7% year-on-year from 3.3%, while core inflation is forecast to edge up to 2.7%.
Wednesday’s PPI report and Thursday’s retail sales figures will also be watched closely.
If those figures come in hot, expectations for Federal Reserve rate cuts could continue to fade. In fact, money markets have already started flirting once again with the possibility of a Fed hike later this year. With the labour market still proving relatively resilient, Fed policymakers are unlikely to sound particularly dovish anytime soon.
Against that backdrop, the dollar may struggle to weaken meaningfully in the near term.
EUR/USD forecast: Upside looks capped
Despite the geopolitical tensions, the euro has held up reasonably well today, mirroring a similar performance from last week as broader risk sentiment remained fairly constructive. Strong enthusiasm around AI-related growth stories in both the US and Asia has continued to underpin risk appetite globally, indirectly helping the euro stabilise.
Still, the underlying eurozone picture remains less convincing. Economic activity data across Europe has continued to disappoint, and the main factor preventing a deeper EUR/USD pullback has been the ongoing risk rally and expectations that the European Central Bank could still tighten policy again this summer.
With oil prices remaining elevated, ECB officials are likely to maintain a relatively hawkish tone. Markets will be paying close attention to speeches from Christine Lagarde and Philip Lane this week for clues about the June meeting. Current pricing still suggests a strong probability of a 25bp ECB rate hike. This won’t come as a surprise anymore, but there is plenty of time until then for the US-Iran situation to be resolved.
Technical analysis and levels to watch
So, the EUR/USD forecast remains challenging. Unless there is a genuine diplomatic breakthrough in the Middle East, rising US inflation expectations and increasingly hawkish Fed pricing could leave EUR/USD vulnerable to another move below 1.1700 in the not-too-distant future.
For now, resistance around the 1.1800 area is holding on the EUR/USD but any further appreciation may start to attract sellers once more.
That said, price action is far from bearish given the fact that we have seen rates hold above the 200-day average and bearish-looking candles not showing any downside follow-through. Against this backdrop, it is difficult to be tactically bearish on the EUR/USD forecast.
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-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
