The Euro to Dollar (EUR/USD) exchange rate has rallied to highs around 1.18 as hopes for a resolution in the US-Iran conflict have undermined near-term dollar demand.

Danske Bank notes a high degree of uncertainty in the short term, but it has shifted its bias and is no longer backing significant short-term EUR/USD losses. The bank is also backing 12-month EUR/USD gains to 1.22 as the dollar retreats further.

It does, however, note that any escalation in the Middle East conflict would trigger renewed dollar demand with the threat of high volatility.

Danske expects monetary policy will be a key medium-term feature for FX markets. After no change in the short term, Danske is backing two Federal Reserve rate cuts by the end of 2026. In contrast, the ECB is expecting rate hikes in June and July which will erode the dollar’s yield support.

It also expects that US inflation will be higher which will undermine real dollar rates while a retreat in energy prices would help underpin the Euro. Danske also considers that fair value for EUR/USD is around 1.25 which means a net tailwind for the Euro.

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Disclaimer: For information only, not investment advice. This EUR to USD forecast summarises and interprets third-party research; views expressed are those of the original source and may not fully reflect the source’s complete analysis. Neither the source nor we accept liability for reliance on this interpretation.