A clash of geopolitical interests has sparked a new wave of tension. Posting its best two-week rally in six months and hitting its highest levels since July, the US dollar kicks off the new week with a confident upward gap. The catalyst was a sharp surge in Brent prices. Oil spiked after Iran responded firmly to Donald Trump’s rejection of a seven-day ceasefire, stating it has no intention of making concessions regarding the opening of the Strait of Hormuz. Recall that a temporary ceasefire could have lifted the US naval blockade of Iranian ports and restored Tehran’s ability to export hydrocarbons.
The energy factor is once again taking center stage. Rising Brent quotes directly hit consumer prices in the States, creating a complex dilemma for the Federal Reserve. How quickly will the secondary effects of expensive fuel accelerate core inflation, and will it become entrenched at high levels for a long time? The regulator’s answer is obvious: action must be swift and tough. The Fed’s “hawkish” pivot in September has effectively resuscitated the battered dollar, forcing speculators to abandon plans to close long positions. On the contrary, interest in the greenback is picking up speed once again.
Expectations of aggressive monetary tightening completely overshadow traditional risks for the US currency: the colossal budget deficit, domestic political turbulence, and Treasury interventions in the markets. Against this backdrop, even skeptics like Morgan Stanley analysts have scrapped their recommendations to buy EURUSD. The bank now forecasts further decline for the pair in 2027. Beyond macroeconomics, the euro is also weighed down by political instability in key Eurozone countries: elections in France are creating serious risks, while Germany and Italy remain zones of heightened turbulence.
A cocktail of expensive oil, inflationary fears, and decisive Fed action continues to drive up US government bond yields, making dollar-denominated assets incredibly attractive. Yields on 10-year Treasuries have been rising for the fourth consecutive week, breaking through 2007 highs. Meanwhile, two-year notes have been in an uptrend for half a year, updating peak values not seen since 2004.
Traditionally, a yield curve inversion is perceived as a Sword of Damocles, heralding a recession. However, the current situation is defying historical patterns. The fundamental power of the US economy is so immense that the market simply does not believe in a downturn. On the contrary, the synergy of the real sector, the artificial intelligence boom, and the stock market is spawning a new wave of talk about “American exceptionalism.” This narrative, of course, plays against the euro.
The euro’s only chance is to try and play on expectations of accelerating inflation in the Eurozone, which could increase the probability of ECB tightening in October. But any bounce in the major currency pair will be purely corrective in nature.
The 1.14 mark remains a hard resistance and a “red line” for EURUSD. Temporary consolidation is possible near this level, but any failed attempts to break above it should be viewed as an excellent opportunity to build up short positions.
