The Dollar Does Not Believe in the Tales of De-escalation

EUR/USD has grown weary of Donald Trump's promises and has begun reacting to what is visibly apparent. The US is unable to strike a good deal with Iran. Tehran is taking advantage of the White House's desire to resolve the conflict diplomatically. It continues to put forth new demands that Americans cannot meet. The situation is looking increasingly tense and hints at a resumption of hostilities. This escalation will heighten demand for the dollar as a safe-haven asset.

The Polymarket odds reflect only a 22% chance that the Strait of Hormuz will be opened by the end of June. Oil has been rising for the third consecutive day, thereby increasing the risk that inflation in the US will remain at elevated levels. As a result, CME derivatives indicate a 54% chance of a federal funds rate hike in 2026. Interest rate swaps indicate an 85% probability of monetary policy tightening this year.

The longer the conflict in the Middle East persists, the higher the risks of this scenario materializing. The US economy can afford higher rates. By the end of 2025, the Federal Reserve had lowered rates due to signs of weakness in the labor market. However, by 2026, the employment situation had stabilized. The number of job vacancies in April was at a two-year high. Investors are eagerly awaiting reports from ADP and the BLS.

According to Cleveland Fed President Beth Hammack, the Fed is currently in a good position. The current level of rates allows it to extend the pause and assess the impacts of the conflict in the Middle East and incoming data. However, if inflation continues to accelerate, the central bank will be forced to act.

Rising geopolitical risks are putting pressure on EUR/USD. Meanwhile, the EUR/USD pair finds support from the consistently record-setting S&P 500 index. Since the beginning of the armed conflict in the Middle East, it has outperformed the MSCI World Index by 10 percentage points. Essentially, this indicates American exceptionalism and should support a rally in the USD index. However, in reality, the successes of the US stock market increase foreign demand for hedging currency risks and limit the potential for strengthening the US dollar.

Nothing is eternal under the sun. It is quite possible that an Iranian attack on Kuwait could trigger a correction in the S&P 500, worsen the global appetite for risk, and increase demand for the US dollar as a safe-haven asset. How much longer can Donald Trump turn a blind eye to Tehran's actions?

Technically, on the daily chart of EUR/USD, bears are attempting to capitalize on the internal doji bar. A break below its lower boundary near the level of 1.1615 will allow for short positions to be formed. If quotes do not return above this level in the near future, the risks of a continued decline toward 1.145 will grow. In such conditions, it makes sense for traders to maintain a focus on selling.