EUR/USD is entering a highly sensitive period shaped by technical factors and changing economic and geopolitical expectations for both the U.S. dollar and the euro. Middle East developments are increasingly treated as drivers of global inflation and the future path of U.S. monetary policy in the second half of the year. The U.S. dollar has stayed resilient even when risk appetite weakens, while the euro has not produced sustained bullish breakouts. Renewed oil price increases after recent U.S. military actions in Iran raise energy costs and revive inflation concerns that had been fading. Central banks face a difficult tradeoff between supporting growth and responding to renewed inflation. Markets previously overestimated rapid U.S. rate cuts, and the Fed may need to keep rates elevated longer if energy prices rise or U.S. inflation accelerates.
"In my view, markets are no longer treating developments in the Middle East as merely temporary political events; instead, they are increasingly viewed as a direct driver of global inflation and the future path of U.S. monetary policy during the second half of the year."
"The most significant development, in my opinion, is the renewed rise in oil prices following the recent U.S. military actions in Iran. These increases do not simply mean higher energy costs; they also revive inflation concerns that markets previously believed were gradually fading over recent months."
"When oil prices rise in such a manner amid a relatively fragile global economy, central banks find themselves facing an extremely difficult equation. On one hand, they do not want to suppress economic growth through aggressive monetary tightening, yet at the same time, they cannot ignore the return of inflationary pressures."
"In my assessment, markets had previously exaggerated expectations for rapid U.S. interest rate cuts, as if the Federal Reserve was close to fully shifting toward monetary easing. However, the current reality suggests that the Fed may be forced to maintain elevated interest rates for longer than previously expected, particularly if energy prices continue rising or if U.S. inflation data begins showing renewed acceleration."
Read at London Business News | Londonlovesbusiness.com
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