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When Donald Trump stated that the armed conflict in the Middle East would end in 2-3 weeks, the markets heard only that the war would soon come to an end. How exactly, no one seemed to care. Investors took this information as a precursor to de-escalation and started buying what they had previously sold, including EUR/USD. However, the truth turned out to be different.
The US President intends to send Iran back to the Stone Age within the next 2-3 weeks, to flatten it, if it does not open the Strait of Hormuz and sign a peace agreement. Immediately after the speech, the White House delivered its list of demands to Tehran, which predictably rejected them as unrealistic. The mutual bombings with Israel show no signs of stopping, and the Iranians are prepared for any turn of events.
Trump's threats are like a storm of shouting, and what the American president fears will soon come to pass. We are talking about a surge in inflation, which will force the Fed to forget about cutting rates. It is precisely this easing of monetary policy that the White House occupant has been striving for with all his might. Iran knows its weak spots and continues to press on them.
For the currency market, an important moment is the transition of inflationary risks into risks of economic growth. In other words, the transition from stagflation to recession. The first scenario is accompanied by an increased likelihood of tightening Fed monetary policy and a rally in Treasury yields, which supports the US dollar. The second, on the contrary, will lead to a revival of rumors of a Fed rate cut, a decline in Treasury yields, and a weakening of the greenback.
The dynamics of EUR/USD depend directly on the US dollar. Especially in conditions where markets are clearly overextending their expectations regarding the three acts of monetary restriction from the ECB in 2026. According to Ecofi, it would be enough for just one to happen. However, if the European economy weakens significantly, it would make sense to forecast a decrease in the deposit rate.
Fabio Panetta, a member of the Governing Council, indicated that issues are already emerging. According to him, even if the conflict in the Middle East were to end tomorrow, the damage to the eurozone would still be inflicted.
In my opinion, prolonging the war in Iran will accelerate inflation and force central banks to tighten monetary policy, thereby negatively impacting the economy. At the same time, the US will exhibit greater resilience to geopolitical shocks than the eurozone. Ultimately, the divergence in GDP growth will push the main currency pair's quotes downward.
Technically, on the EUR/USD daily chart, the bulls made yet another unsuccessful attempt to break above the fair-value level of 1.160 and hold it. This indicates weakness among buyers and provides grounds to resume selling toward 1.145 and 1.135. At least for now, as long as the euro trades below $1.154.
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