Investors have seen this script before. If it used to be a long-running TV series, now we’re watching a fast-paced short film. At the onset of the Middle East conflict, the US dollar rallied confidently alongside soaring oil prices. Its safe-haven status and the position of the US as a net exporter of energy resources played right into the hands of EUR/USD bears. Yet, what followed was a seemingly illogical retreat by the greenback. The exact same dynamic is playing out now, and the reason behind it is well known.
It seems all the trump cards are in the dollar’s favor: equity indices are falling (signaling reduced risk appetite), 10-year Treasury yields have hit their highest levels since May, the IMF has updated its forecasts, and the minutes from the June FOMC meeting came out quite hawkish. Yet, instead of the expected drop, the EUR/USD pair not only held its ground but climbed back above the 1.14 mark.
The International Monetary Fund has revised its US GDP forecast for 2027 upward, from 2.1% to 2.2%, while keeping the estimate for the current year unchanged at 2.3%. The cited drivers are the boom in artificial intelligence investments and massive fiscal stimulus. Meanwhile, the Eurozone GDP forecast for 2026 was downgraded from 1.1% to 0.9%. The main reason is the IMF’s expectation that oil prices will be, on average, 32% higher than in 2025. For a currency bloc critically dependent on energy imports, this is clearly a negative signal.
The minutes from the June Fed meeting revealed that the regulator is prepared to hike rates if inflation accelerates and intends to hold them steady if the PCE index gradually decelerates. At the same time, an increasing number of committee members are expressing concern that rising energy prices will bleed into core inflation through second-round effects. Furthermore, AI investments could trigger a new wave of acceleration in the Personal Consumption Expenditures (PCE) index, adding to the inflationary woes following the tariff wars and the Middle East crisis.
The “hawkish” undertones in the FOMC minutes and the oil rally only briefly emboldened the EUR/USD bears. The major currency pair soon fully recovered its losses, despite the intensification of US bombings in Iran. Perhaps the euro was aided by the fact that European bond yields were rising faster than US Treasuries?
In reality, the TACO factor (Trump Always Chickens Out) has returned to the market. Donald Trump’s declarations that “it’s all over” with Tehran may, in fact, turn out to be a classic negotiating tactic—a pivot from escalation to de-escalation. Investors have seen this playbook before. Shortly after, the US president added that Iran itself is seeking opportunities for negotiations. A familiar script, isn’t it?
