EUR/USD is currently positioned at approximately 1.16382 in the European session on Monday, reflecting an increase of about 0.31%. The pair has made a recovery from the 1.1575 level, which represented the lowest point since April 7 last Thursday. The intraday range has extended from a low of 1.16287 to a high of 1.16538, with the spot increasing by 0.00356 during the session as the U.S. Dollar Index remains around 99.03 and Brent crude futures decline by approximately 5% amid optimism regarding peace in Iran. The current situation facing the euro is indeed characterised by dual dynamics. The recent developments over the weekend regarding U.S.-Iran negotiations have led to a decrease in the dollar’s safe-haven premium. Meanwhile, an April U.S. CPI print that exceeded expectations has tempered Fed rate-cut speculation, thereby constraining the extent of the EUR/USD rally in a single movement. The pair experienced a gap up during the Asian session, surged towards the mid-1.1600s, and is currently positioned just beneath a significant resistance zone that starts at the 38.2% Fibonacci retracement level around 1.1675-1.1680. Determining whether the spot will break through that zone or retreat towards the 1.1574-1.1600 support level will be influenced more by upcoming U.S. data and news headlines than by developments in Frankfurt over the next few sessions.
The most straightforward assessment of the factors influencing EUR/USD can be derived from examining the extent to which cross-asset correlations have been repriced in the last week. The DXY has exhibited a 0.89 rolling correlation with Brent crude over the last five sessions, marking the most robust positive relationship among the major macro drivers. This indicates that the dollar index is now acting as a subtle proxy for oil prices within the foreign exchange landscape. Front-end U.S. Treasury yields are influencing the dollar, exhibiting a 0.81 correlation with the two-year. This reinforces the interpretation that markets are viewing crude prices as a proxy for the short-term inflation trajectory and the Federal Reserve’s response strategy. Brent’s decline to $95.35, along with the U.S. 10-year yield moving lower, has removed one of the dollar’s most dependable supports. Declining oil prices reduce the headline inflation impact, subsequently affecting the trajectory of nominal yields, which in turn weakens the dollar. The EUR/USD pair serves as the most straightforward counterparty trade in this scenario, as the eurozone, being a significant net energy importer, stands to gain more from falling oil prices. The dollar’s safe-haven appeal during the most challenging weeks of the Iran standoff is diminishing with each passing day. That is the macro engine operating beneath the 1.1638 print. The notable wrinkle is that the 20-day and 60-day correlations between DXY and Brent are not nearly as strong as the five-day window, indicating that the market has become singularly focused on geopolitical headlines in the short run and is overweighting them relative to the longer structural picture. Such a compressed, headline-driven correlation environment often experiences a sharp reversal when the next opposing headline emerges.
The U.S.-Iran conditional ceasefire has now been in effect for over seven weeks, leading to a gradual resumption of tanker traffic through the Strait of Hormuz. Donald Trump’s recent comments, referring to the peace agreement as “largely negotiated” and labelling any final deal as “good and proper” and “the exact opposite” of the Obama-era nuclear accord, have placed risk assets into a state of heightened focus. The current dynamics in FX markets reveal an asymmetric reaction function where any indication of de-escalation leads to a significant rally in the euro and sterling, despite the underlying details being mixed or contradictory. The Iranian foreign ministry has indicated that an agreement is not on the horizon, with significant issues such as the management of the Strait of Hormuz still pending resolution. However, market sentiment appears to be increasingly inclined towards a more optimistic outlook. A confirmed reopening of the strait would not only alleviate European energy import costs but would also eliminate a tail risk that has been sustaining the DXY through its safe-haven appeal. The secondary effects on European supply chains, inflation, and growth will eventually face closer examination. However, at present, the prevailing trend is the reduction of geopolitical premium, with EUR/USD emerging as one of the most straightforward beneficiaries of this adjustment on the long side.
The momentum of the EUR/USD rally is currently being tempered by the U.S. inflation data. April’s CPI exceeded expectations, driven by persistent shelter costs and the ongoing impact of earlier energy price increases, resulting in both headline and core readings remaining stronger than consensus forecasts. The recent print has bolstered the argument for the Federal Reserve, led by new chair Kevin Warsh, to maintain its current policy stance instead of hastening rate cuts. This development has initiated a significant repricing in the front end of the U.S. curve. CME Group’s policy probability tracker indicates a 98.1% likelihood of maintaining the 3.50%-3.75% range at the upcoming meeting, while the probability of an increase to 3.75%-4.00% stands at just 1.9%. Notably, there is a significantly lower probability of near-term rate cuts. That maintains the U.S. real yield premium stronger than markets had anticipated just weeks prior, which limits the extent to which the dollar can decline, even as Brent prices fall and the peace-trade dollar selling takes place. The EUR/USD rally is progressing despite facing a structural rate-differential headwind that will persist until there is a shift in the U.S. data. The trajectory towards 1.1700+ for the pair is contingent upon weaker U.S. inflation data, a validated dovish shift from the Fed, and an ongoing reduction in the U.S. real yield premium relative to the bund curve. None of those have aligned in any definitive manner as of now.
The European Central Bank has indicated a slightly more accommodative position in its recent communications, as slower eurozone growth and softer inflation trends provide the council with greater flexibility to reduce rates compared to the Federal Reserve at this time. The relative-policy narrative is thus somewhat supportive of the euro, a sentiment that is not being fully recognised by the current market activity. The ECB’s readiness to implement cuts, contrasted with the Fed’s hesitance to ease, typically suggests an expansion of the rate differential against the euro. However, the nuance lies in the fact that markets have already factored in a significant portion of that divergence. The marginal incremental dovish surprise from Frankfurt would require substantial significance to pull EUR/USD lower from this point. Conversely, any easing in the Fed’s position—especially if the PCE print on Thursday comes in soft—would narrow the differential in favour of the euro. That asymmetric setup is significant. The base case suggests that the policy divergence narrative continues to pose a slight challenge for the euro. However, there exists an upside risk that this dynamic could reverse into a supportive factor if U.S. data deteriorates prior to any further weakening in eurozone data.
The upcoming macro week is set to be one of the most active of the month for the EUR/USD complex. On Thursday, the U.S. Q1 GDP will be released at 12:30 PM, with the consensus estimate set at +1.5% for the second estimate. The April core PCE deflator is set to be released at 12:30 PM on the same day, with consensus expectations at +0.3% month-on-month. This figure serves as the Federal Reserve’s preferred inflation measure and is the most significant data point for the dollar this week. Initial jobless claims data will be released concurrently, providing an immediate indication of labour market conditions. On Friday, preliminary German inflation is set to be released at 12:00 PM, with expectations at 2.9%. Additionally, Canadian Q1 GDP will be announced at 12:30 PM, where the annual figure is anticipated to shift from -0.6% to +1.5%, and the quarter-over-quarter figure is projected to change from -0.2% to +0.1%. The German inflation print is significant for the bund yield reaction, which subsequently influences the EUR/USD rate-differential channel. A strong German figure would elevate bund yields, reduce the rate differential with Treasuries, and bolster the euro. A soft German print would likely hinder any spot recovery. U.S. retail sales and a series of Federal Reserve speakers throughout the week complete the calendar, with each address having the capacity to influence short-term rate expectations and the value of the dollar accordingly. The intraday structure on EUR/USD is currently situated above the 23.6% Fibonacci retracement of the April-May decline at 1.1638. The 4-hour technical indicators are showing signs of improving momentum, although a fully confirmed bullish breakout has not yet been established. The 4-hour RSI is currently at 58, well above the 50 midline and showing an upward trend. The MACD is slightly positive and has recently crossed above the signal line, indicating a scenario where directional risks favour an upward movement, although the confirmation of the trend remains uncertain.
The initial overhead checkpoint is the 38.2% Fibonacci retracement at 1.1675-1.1680, where the price will encounter significant supply for the first time. Above that, the 1.1710 confluence, which combines the 200-period SMA on the 4-hour chart and the 50% Fibonacci retracement, represents a significant resistance band that must be overcome for the medium-term bearish structure to start to break. A breakthrough at 1.1710 would pave the way towards the 61.8% Fibonacci retracement around 1.1740, followed by the 78.6% level at 1.1785, and eventually the cycle high at 1.1842, should the dollar’s weakness significantly persist. The downside map on EUR/USD is organised around a series of support levels that must remain intact to sustain the corrective recovery. Immediate support is located at the 23.6% Fibonacci retracement level of 1.1638, which also marks the breakout point from the previous downtrend. A clear dip below this level would alter the near-term bias to a neutral-bearish stance. The 1.1600 round-number level serves as the next reference point, while 1.1574 functions as the structural Fibonacci anchor and represents last week’s swing low. A daily close beneath 1.1574 would reactivate the overarching bearish trend that characterised the decline from April to May, potentially leading towards the 1.1500 psychological level and the deeper supply zone. Some technical desks have identified the 1.158-1.156 Fibonacci confluence zone as the upcoming demand cluster in the event of a deeper unwind. The clearest interpretation is that the structure continues to be corrective within a wider range, provided that EUR/USD stays above 1.1574 on a closing basis. The directional bias will only shift to decisively bullish once the 1.1710 confluence is breached on volume.