The dollar rose only to fall

• The USD index continues to react to news from the Middle East.
• Divergence in monetary policy is working in favour of the EURUSD.

The dollar went on a rollercoaster ride amid escalating conflict in the Middle East, rising to its highest level since early April. But this rally proved short-lived. An insider report published by Bloomberg stated that the US and Iran had agreed to a 60-day ceasefire and the reopening of the Strait of Hormuz within 30 days. Details are not yet known, so EURUSD is in no hurry to force the issue and push higher.

The euro is supported by improving global risk appetite and the ECB’s intention to tighten monetary policy in June. A rate rise could have happened as early as April. According to the minutes of the Governing Council’s previous meeting, some members had no objection to raising rates. The futures market is pricing in 2–3 rounds of tightening in 2026. Given a 54% probability that the federal funds rate will remain unchanged, this divergence favours EURUSD.

According to John Williams, President of the Federal Reserve Bank of New York, monetary policy is where the Fed wants it to be. This is a good position from which to assess developments in the Middle East conflict and other economic data.

Bloomberg experts believe the USD index will fall by 1% by early July and by 2% by early October. Goldman Sachs believes that an end to the US-Iran standoff will lead to a rise in currencies hardest hit by geopolitical tensions, such as the Swedish krona, the New Zealand dollar, and the British pound.

The US dollar’s retreat and the worst monthly decline in oil prices since 2020 are supporting the currencies of importing nations. Alongside the euro, the yen is also strengthening. USDJPY bulls pushed prices towards the psychologically significant 160 level, only to retreat. The futures market is pricing in a 40-basis-point rate hike in 2026, with odds of a June overnight rate hike at 3 to 4.

After falling to its lowest levels since late March amid ceasefire breaches, gold quickly recovered on rumours of a deal between the US and Iran.

The FxPro Analyst Team