The euro has made some gains

• EURUSD is finding support from the ECB.
• Donald Trump is calling on the Fed to cut interest rates.

Donald Trump seems to have found Tehran’s Achilles’ heel – Kharg Island, which serves as a port for exporting up to 90% of Iranian oil. Brent oil prices declined somewhat after threats to destroy energy infrastructure on the island if the Strait of Hormuz is not opened. Consequently, EURUSD mounted a counterattack to retest the 1.15 resistance level.

As the conflict in the Middle East escalates, the link between the US dollar and oil grows stronger. This is leading to a bullish outlook on the USD index until the standoff ends. The euro has been one of the main casualties due to fears of a potential return of the energy crisis in Europe. Once markets set aside their emotions and began thinking rationally, an opportunity for a pullback in EURUSD appeared. Indeed, current events have global implications. This differs from 2022, when the greatest impact was felt in the eurozone.

Four years ago, the ECB lagged significantly behind the Fed in tightening monetary policy. This was one of the reasons the Euro fell below parity with the Dollar from August to November 2022. This time, the European Central Bank is determined not to let history repeat itself. It is prepared to raise rates to maintain control over prices. According to the regulator’s estimates from December 2023, a surge in Brent crude from $80 to $130 per barrel would slow GDP by 0.75 percentage points and add around 1 percentage point to inflation.

Donald Trump, on the other hand, anticipates that the Fed will ease monetary policy. The President has urged Jerome Powell to convene an extraordinary FOMC meeting and cut interest rates. In his view, even a primary school pupil can see the necessity of this. It is unlikely that Committee members will heed the Republicans’ call, although they may keep the door open for a resumption of the monetary expansion cycle. The futures market has been too quick to dismiss the possibility of two rate hikes in 2026. If the Fed maintains its previous stance, EURUSD is likely to rise.

However, while oil prices are firmly trending upwards, any increase in the main currency pair will be seen as a correction. Without the resumption of operations in the Strait of Hormuz and a resolution to the conflict in the Middle East, the US dollar will remain strong. Local gains in EURUSD may be linked to reports of tankers passing through the world’s main oil artery, as several Indian vessels have done.

The FxPro Analyst Team