Following last week’s surge in the US dollar, there was some further upside initially and that caused the EUR/USD to fall to 1.15 handle first thing this morning, before bouncing back. The euro initially fell further as oil prices extended their gains on fresh escalation in the Middle East conflict with Iran and Israel exchanging fires. However, the moves unwound slightly by late morning London trade as Trump said that Israel and Iran were looking to do an immediate ceasefire. The US president said, “final negotiations are proceeding, subject to stupidity getting in its way.” Oil prices pared earlier gains and then turned negative after Ian reportedly declared end of military operations against Israel. Looking ahead, US CPI and ECB’s rate decision are among the important macro events for the EUR/USD forecast this week.

 

Dollar looking to advance gains

 

Last week, the greenback rallied after a much stronger-than-expected labour market report prompted investors to reassess the outlook for Federal Reserve policy, sending yields higher.  Looking ahead, we have US CPI and ECB rate decisions looming this week. Traders are also watching oil prices and the US-Iran-Israel situation. Hopes for a potential deal between the US and Iran to open the Strait of Hormuz faded after the latest escalation in the conflict. But with oil prices turning red on the day and still holding in the existing ranges, markets are still betting that the strait will re-open soon. 

 

The US dollar gain strong momentum last week as investors increasingly factored in the possibility of tighter monetary policy, while the sell-off in stocks also reinforced demand for the greenback. Expectations of tighter monetary policy gained ground on the back of a strong US jobs report, which pointed to a labour market that has regained momentum during the first half of 2026, reducing concerns about an imminent slowdown in economic activity.

 

Traders have now fully priced in a quarter-point Federal Reserve rate increase by year-end, a notable shift from expectations just a few weeks ago.

 

This week’s US inflation releases could reinforce that view. Consensus forecasts suggest headline CPI may move to 4.2% year-on-year in May, while producer price pressures remain elevated. With the Federal Reserve entering its pre-meeting blackout period ahead of the June FOMC decision, policymakers have limited ability to push back against increasingly hawkish market pricing.

 

As a result, the dollar may continue to attract support heading into the meeting, particularly as investors anticipate the Fed could adopt a firmer policy stance and further distance itself from any perception of easing.

 

Keep an eye on equity markets

 

The US dollar could find haven flows if we see fresh selling in the tech space, following Friday’s big plunge. While the upcoming SpaceX IPO might bring out the bulls again, currencies with strong links to global sentiment may remain particularly vulnerable if weakness in the sector persists. Today, though, index futures were higher as markets attempted to regain their poise after Friday’s drop. But should we see another sharp retreat from risk assets this week, this would most likely favour the dollar against high beta currencies. Meanwhile, geopolitical developments continue to underpin safe-haven demand for the greenback. That said and despite the escalation of direct hostilities between Iran and Israel, oil prices have remained relatively contained.

 

Will it be a hawkish ECB hike or a dovish one?

 

The ECB is likely to maintain a firm tone despite growth concerns, when it meets to decide on policy on Thursday. The single currency came under heavy pressure against the dollar at the end of last week, reflecting the broad-based strength of the greenback. But we could see some euro-specific movements this week if the ECB turns out to be more hawkish or dovish than markets are expecting. The central bank is widely expected to raise its deposit rate by 25 basis points to 2.25%. More important than the rate move itself will be the tone of the accompanying guidance.

 

A relatively hawkish message remains the most likely outcome. Policymakers are expected to leave the door open to further tightening later in the year amid the energy market uncertainty. The challenge for the ECB is that growth indicators are beginning to soften all thanks to the developments in the Gulf. At the same time, renewed strength in energy prices complicates the inflation outlook. This combination of slowing growth and persistent price pressures may leave the EUR/USD forecast struggling to gain bullish traction.

 

Technical EUR/USD forecast

 

 

 

The EUR/USD is likely to remain under pressure, despite today’s bounce back. For now, the 1.1500 level has held firm. This will continue to act as a key battleground this week. A sustained move away from here may prove difficult while markets remain focused on the prospect of further Fed tightening. But with the prior bullish price action failing to lead to any bullish breakthrough, the risks remain tilted to the downside.  A clean breakdown below 1.1500 would bring the March low of 1.1410 into focus, barring a plunge in oil prices – say as a result of a deal between the US and Iran to re-open the Strait of Hormuz. Resistance is now seen around the 1.1570-1.1600 area, followed by 1.1670 and then 1.1700.

 

 

 

 

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R