Middle East Ceasefire Weakens the Dollar

The U.S. Dollar Index (DXY) dropped by 1.2% to 97.98 points this week, while the EURUSD rose by 0.77% to 1.16120 as currency markets responded to rapid shifts in Middle East tensions. Initially, the Euro rebounded from support at 1.14500 to 1.15500 after U.S. President Donald Trump announced a two-week pause before deciding on further action against Iran. However, when Trump later ordered strikes on Iranian nuclear sites and Iran responded with retaliatory attacks, the EURUSD fell back toward 1.14500. A confirmed break below that level could have triggered a deeper decline toward 1.12000–1.13000. But Iran ultimately chose a symbolic response, launching a limited missile strike on a U.S. base in Qatar before signaling a willingness to de-escalate. As fears of a broader conflict receded, markets responded swiftly. The EURUSD surged back toward 1.15500 and climbed to 1.16220 after Trump declared a ceasefire between Israel and Iran, marking the pair’s highest level since June 12.

Large investors appear to have anticipated the move, showing restraint during the geopolitical swings. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) recorded a neutral balance last week, though cumulative outflows over previous months — which began when EURUSD traded at 1.09500 — suggest that market participants remain broadly bearish on the greenback.

With geopolitical risks receding, focus is now shifting to economic fundamentals. The main event this week will be Federal Reserve (Fed) Chair Jerome Powell’s testimony to Congress on Tuesday and Wednesday. His messaging could determine the dollar’s short-term direction. While recent inflation spikes had been attributed to geopolitical risks, those pressures are now easing. The May CPI report revealed a weaker-than-expected acceleration, and signs of a broader economic slowdown have emerged. This creates space for a more dovish tone from the Fed, though Powell could also choose to maintain a hawkish stance based on lingering tariff-related inflation concerns. His testimony will be pivotal for EURUSD, which could break higher toward the extreme upside target of 1.18000–1.19000 if Powell sounds dovish. However, a more hawkish tone could pull the pair back into the primary trading range of 1.14500–1.15500.

Further key data will arrive later in the week. On Thursday, final Q1 GDP figures are expected to show a 0.2% contraction quarter-over-quarter, confirming the slowdown. On Friday, the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) price index — will be released, with expectations of only a modest rise, supporting a balanced policy outlook.

Technically, the EURUSD remains at a crossroads. A pullback below 1.15500 would likely send it back to 1.14500, while a firm close above 1.16200–1.16400 would signal momentum toward the 1.18000–1.19000 resistance zone.