The euro is being saved only by the hope of de-escalation. That is the best way to characterize the outcome of the past week, which initially looked highly favorable for EUR/USD bears: geopolitical tensions and new tariff threats fueled fears of US inflation and bolstered expectations of Fed rate hikes. Nevertheless, the last five-day trading week of July began for the major currency pair with a classic upward gap. The reason is banal: Washington is running out of leverage. And although the White House claims that Donald Trump has “all options on the table,” there are simply no truly winning ones among them.
Tariffs No Longer Scare
Eighteen months after the most massive wave of protectionism since the 1930s, it has become evident: the imposed duties have neither slowed down the US economy nor triggered a sharp spike in inflation. Trump’s ambitious plans to reduce the foreign trade deficit have also remained on paper. In this context, the replacement of temporary levies with long-term tariffs of 10–12.5% has gone largely unnoticed by the markets.
New Threats and Inflationary Risks
However, it is too early to relax. Irritated by the EU’s massive fines against US tech giants, the White House is threatening Brussels with new, large-scale, and swift tariffs. And although inflation due to import duties is not growing as fast as forecasted, it remains persistently above pre-pandemic levels, especially in the services sector. This creates a high risk of a new wave of consumer price growth if the Middle East conflict prolongs. Unsurprisingly, the odds of monetary policy tightening at the upcoming FOMC meeting have reached their highest levels since September 2024.
ING’s Stance and the Kevin Warsh Factor
ING analysts are confident: investors will be seriously disappointed by the lack of “hawkish” rhetoric from the Fed. Recent macro data on inflation and the labor market have been weak, and Kevin Warsh’s laconic style will not leave EUR/USD bears much room for speculation. Nevertheless, the bank acknowledges that the dollar will retain support amid the ongoing instability in the Middle East.
Geopolitics: A Pause in Bombings
The US has suspended its 13-day bombing campaign in Iranian territory. The formal reason is Tehran’s unwillingness to escalate the conflict further. However, Wall Street Journal insiders claim the real motive is more prosaic: the US lacks sufficient air defense systems to reliably protect its bases in the region.
Market Psychology and the TACO Strategy
Subconsciously, the market is already pricing in a de-escalation scenario. A characteristic signal was the rally of Brent crude above the $100 per barrel mark. Historically, in such situations, the TACO strategy (Trump Always Chickens Out) has played out.
💡 Trading Conclusion
In this context, the upward gap in EUR/USD at the week’s open looks entirely logical. Long positions opened on the bounce from the lower boundary of the trading range 1.137–1.147 have proven to be quite successful. Without fresh “hawkish” surprises from Kevin Warsh, the major currency pair will find it extremely difficult to close this price gap.
Recommendation: Hold long positions with a view to a further bounce and gap fill.
