A single remark from Donald Trump was enough to let EUR/USD breathe a sigh of relief. The U.S. President promised that strikes on Iran would be short-lived. Markets reacted instantly: oil prices pulled back, Treasury yields declined, and the probability of a Fed rate hike in September plunged from 70% to 62%. Add weak macroeconomic data and dovish commentary from FOMC officials to the mix, and you have the perfect recipe for a greenback pullback.
New York Fed President John Williams stated outright that a rate hike in September is unnecessary. According to him, second-round inflationary effects are not yet materializing, and factors such as tariffs and geopolitical tensions are merely temporary. The cherry on top was the ADP employment data: the U.S. private sector added a mere 38,000 jobs in August. This combination of factors served as a springboard for a bullish rally in EUR/USD.
The pair snapped a nine-day streak of consecutive downside risks—the longest such streak since 2017. Hopes for a Middle East resolution provided a much-needed breath of fresh air for the euro. But let’s be honest: the underlying problem hasn’t vanished. No matter how much Trump talks about a swift end to the operation, the ongoing buildup of U.S. military forces in the region suggests otherwise. Meanwhile, Europe has backed itself into a corner with a gamble that could severely damage its currency.
Endless White House assurances of a swift conflict resolution led Brussels to delay natural gas purchases. The bet was on a peace deal that would reopen the Strait of Hormuz and send energy prices tumbling. However, that plan has failed, trapping Europe. Gas storage facilities are only 65% full—the lowest level in 15 years. Consequently, gas prices have surged to their highest levels since early 2023.
The scenario is eerily reminiscent of 2022, when the energy crisis dragged the euro below parity with the U.S. dollar. The situation is further exacerbated by looming political turmoil in France and Germany.
The only real lifeline for EUR/USD is if the Fed decides to hold rates steady at its September 15-16 meeting. For markets that have largely priced in monetary tightening, this would come as a cold shower. The upcoming August U.S. employment report will be crucial in helping the central bank make up its mind. Until that data is released, the pair is likely to consolidate in a tight range.
Frankly speaking, it is hard to believe in a rapid de-escalation of the Middle East crisis. A prudent strategy right now is to either stay on the sidelines or sell the euro on bounces toward the $1.1615 and $1.1635 levels. An alternative scenario is to initiate short positions if EUR/USD fails to reclaim and hold above the 1.1600 mark.
