EUR/USD is experiencing a significant decline. The pair fell to an intraday low of 1.1698 during Monday’s European session — a level not observed in weeks — before recovering slightly to trade around 1.1734. The day reflects a decline of approximately 1%, a significant shift in the context of major foreign exchange movements. The Dollar Index experienced a notable increase of 0.89%, reaching 98.43 and briefly exceeding 98.50 for the first time since January 22. The factors propelling this movement are aligned: a geopolitical shock that inherently benefits the dollar compared to the euro, recently released domestic German data that is alarmingly weak, and a Federal Reserve that sees no reason to lower rates while oil prices are surging. The 200-day simple moving average for EUR/USD is currently positioned at 1.1666. It is now clearly targeted. The joint military operation between the U.S. and Israel, dubbed “Operation Epic Fury,” resulted in the death of Supreme Leader Ayatollah Ali Khamenei over the weekend. This campaign targeted over 2,000 locations throughout Iran and provoked retaliatory missile and drone strikes from Iran on Bahrain, Dubai, Saudi Arabia, and U.S. military installations in the Gulf region. Hezbollah has engaged in the conflict originating from Lebanon. Reports indicate explosions occurred in proximity to the U.S. embassy in Kuwait. President Trump that operations are “ahead of schedule” and mentioned a timeline of four to five weeks for ongoing military action, with regime change as the clear goal.
The immediate foreign exchange outcome is straightforward: capital migrates towards the dollar. The DXY has surpassed the $98.02 resistance level on the 2-hour chart and is currently establishing higher lows along an ascending trendline. The 50-period EMA is positioned significantly below the current price, whereas the 100-period EMA is showing signs of flattening — indicating a potential momentum acceleration. The RSI on the Dollar Index stands at 60, indicating robust buying momentum while remaining below overbought levels. The upcoming technical targets for DXY are $98.31, followed by $98.60, and then $98.86. A definitive move beyond $98.86 paves the way to $99.00. Support is established at $97.76 and $97.56. The structural asymmetry between the U.S. and Europe contributes significantly to the durability of this dollar bid. The United States has achieved energy independence. Europe is not performing as expected. With the Strait of Hormuz effectively shut — Iran’s IRGC declared passage forbidden, Maersk suspended all crossings, and more than 200 tankers are stationary outside the chokepoint — Europe’s reliance on Middle Eastern energy imports emerges as a significant vulnerability. Brent crude experienced a significant increase of 9%, reaching the $75–$79 range. European natural gas prices surged by nearly 50% following QatarEnergy’s suspension of LNG production at facilities impacted by retaliatory attacks. Qatar provides approximately 10% of the liquefied natural gas consumed in Europe. Every increase in energy prices expands the competitiveness divide between the U.S. and Eurozone economies, leading to capital flows that move out of the euro and into the dollar.
Experts are cautioning that a prolonged increase in oil prices approaching $100 per barrel may contribute an additional 0.6 to 0.7 percentage points to global inflation rates. For Europe, which relies on imports for nearly all its crude oil and a substantial portion of its gas, the impact on consumer prices would be considerably greater. This situation presents a stagflationary challenge for the European Central Bank, characterized by slowing growth coupled with a resurgence of inflation. This scenario represents the most unfavorable macroeconomic environment for EUR/USD. Domestically, the euro gained no support from Monday’s data. In January, German retail sales experienced a decline of 0.9% month-over-month, significantly underperforming the consensus expectation of a 0.2% decrease. Year-over-year growth has slowed to a mere 1.2%, indicating that German consumers are significantly reducing their spending due to tariff uncertainty, high prices, and increasing geopolitical concerns. This situation is not merely a soft patch; it represents a significant collapse in consumer confidence within the Eurozone’s key economy. The one silver lining in the German data picture was the HCOB Germany Manufacturing PMI, which rose to 50.9 in February — its highest reading in 44 months and the first time the index has crossed above the 50 expansion threshold in nearly four years. Typically, that would represent a significant advantage for the euro.
However, these conditions are far from typical. The elevated energy prices associated with the ongoing conflict pose a significant risk to stifling any potential recovery in manufacturing before it can truly take hold. Industrial production is heavily reliant on energy, which has recently seen a significant increase in cost and a decline in security for all European manufacturers. The recent PMI increase appears to be a temporary phenomenon — a single positive reading that is expected to be undone if crude oil prices hold above $75 and European gas prices continue to be high. From the perspective of the U.S. economy, the Federal Reserve sees no justification for a reduction in policy measures. The CME FedWatch tool indicates a mere 4.4% likelihood of a March rate cut to 3.25–3.50%, while a significant 95.6% of participants are anticipating rates to remain steady at 3.50–3.75%. January’s core Producer Price Index recorded a significant 0.8% month-over-month, marking the highest monthly figure since mid-2025. U.S. companies are transferring tariff costs directly to consumers, and the administration’s use of Section 122 to implement universal 10% tariffs — with Trade Representative Jamieson Greer suggesting a possible increase to 15% — introduces an additional inflationary pressure.
Fed Governor Stephen Miran suggested the potential for more significant rate cuts if inflation pressures stay subdued, though this statement was made prior to the death of Iran’s supreme leader and the closure of the Strait of Hormuz. With oil prices exceeding $73 and on the rise, the inflation outlook has significantly turned hawkish in just 72 hours. The upcoming February ISM Manufacturing PMI and Employment Index, scheduled for release later on Monday, will offer the next immediate insight into the extent to which tariff and energy cost pressures are impacting U.S. factory activity. Any unexpected positive outcome enhances the dollar’s rate differential advantage compared to the euro. 10-year U.S. Treasury yields remained close to an 11-month low at approximately 3.9% early Monday, before rising back above 4.0% as the rally in oil prices reignited concerns about inflation. The yield reversal is noteworthy — bonds initially experienced a rally due to a flight-to-safety, yet the inflationary effects of prolonged crude prices above $70 are beginning to overshadow the demand for Treasuries as a safe haven. Increased yields bolster the strength of the dollar. The broader the U.S.-Eurozone rate differential persists, the stronger the influence the greenback has on EUR/USD.