Euro Runs Out of Steam

The U.S. Dollar Index (DXY) remains pinned near 98.18 points, while the EURUSD is trading slightly higher by 0.05% at 1.15550 this week. The pair has already surpassed all key technical upside targets, having broken above the primary resistance at 1.15500 immediately after the release of weaker-than-expected U.S. consumer inflation data for May on June 11. The pressure on the Greenback continued the next day when producer price index (PPI) data for May showed a mixed picture: headline PPI rose in line with expectations to 2.6% year-over-year from 2.5%, but core PPI, excluding food and energy, unexpectedly declined to 3.0% from 3.2%. These figures suggested that the inflation spike driven by tariffs was milder than the Federal Reserve (Fed) had anticipated, prompting investors to begin pricing in the possibility of an earlier rate cut and fueling a further decline in the Dollar. As a result, EURUSD broke its April high of 1.15730 and reached a peak of 1.16310, clearing a major resistance zone and increasing the likelihood of a rally toward the extreme upside target of 1.18000–1.19000.

However, the picture shifted dramatically when an unexpected war erupted in the Middle East. In the early hours of June 13, Israel launched a large-scale strike on nuclear and military targets in Iran, which retaliated with ballistic missile attacks. The EURUSD quickly dropped to 1.14880 in response. Hopes for a de-escalation faded on Monday after Israel carried out another wave of strikes, prompting an even stronger response from Iran. U.S. President Donald Trump urged Tehran residents to evacuate, a message widely interpreted as a signal that Washington might join the conflict, though no U.S. involvement has materialized thus far. As tensions escalated, the EURUSD bounced back near 1.15500. If the pair can stabilize above this level, the U.S. Dollar could face renewed pressure, and the Euro may resume its rally toward the 1.18000–1.19000 range. On the other hand, a sustained move below the 1.14500 level would invalidate this bullish scenario.

Given the current geopolitical uncertainty, taking mid-term trading positions in the pair appears risky. Nevertheless, large investors seem to maintain their bearish stance on the Greenback. Last week, they sold an additional $1.3 million worth of shares in the WisdomTree Bloomberg US Dollar Bullish Fund (USDU), extending a trend of bearish positioning that persists despite escalating global tensions. This view might seem counterintuitive, but from a macroeconomic standpoint, it has merit. U.S. inflation remains subdued and the broader economy shows signs of cooling. Under normal conditions, the Fed could signal a rate cut. However, the recent 17.0% spike in oil prices complicates that outlook, as easing policy in the face of inflationary risks would appear reckless. Instead, during its meeting this week, the Fed is expected to adopt a neutral tone, acknowledging rising geopolitical-driven inflation risks without fueling panic that could trigger another stock market decline like the one seen in March–April. In this context, the most balanced course would be for the central bank to hold steady, allowing the EURUSD to consolidate around 1.15500. Near-term direction will hinge on developments in the Middle East: further escalation could drive the pair down to 1.14500, while signs of de-escalation may lift it back toward 1.16300. A confirmed rally toward the 1.18000–1.19000 zone would require a successful retest and break above 1.16500.