Renewed US-Iran tensions have lifted crude oil and revived the US dollar, tilting the EUR/USD forecast to the downside. FOREX.com analyst Fawad Razaqzada argues that if Brent keeps climbing, energy costs could outweigh the euro's rate support. Traders now await US inflation data and Chair Kevin Warsh's testimony.
Rising energy costs could soon matter more for the euro than interest rate differentials, leaving the EUR/USD forecast increasingly bearish, according to FOREX.com. Escalating tensions between the US and Iran have again pushed crude prices higher, supporting the dollar against lower-yielding currencies such as the Swiss franc. The euro has held up better than some peers on expectations that the European Central Bank may have to tighten its policy further, but the balance of risks stays to the downside.
Oil-driven inflation fears revive the dollar
After a weak US jobs report cost the dollar some momentum, the greenback has regained it as markets price in the risk that fresh Gulf disruptions could tighten global energy supplies. Brent crude has climbed to around $87 a barrel, though current pricing suggests investors are not yet convinced a major supply shock is imminent.
That leaves room for both oil and the dollar to extend gains if tensions worsen. At the height of the crisis a few months ago, oil prices reached north of $110 and spent much of that time around the $100 level. The dollar, meanwhile, has stayed in sight of 13-month highs as the inflation picture comes back into focus.
CPI and Warsh testimony in focus
Because the Fed dropped forward guidance after its hawkish shift in June, traders now assign a meaningful probability to a rate increase before the end of the summer. Attention turns to Chair Kevin Warsh's first semiannual testimony to Congress, where he is expected to avoid strong policy signals.
The latest US inflation figures could reinforce the case for tightening. Even so, headline CPI is expected to print 3.8% year-on-year for June, down from 4.2% in May. Core CPI is seen easing modestly to 2.8% from 2.9%, though sticky core prices are unlikely to reassure.
Euro's yield support meets an energy headwind
The euro has avoided sharper losses largely because eurozone bond yields have risen alongside US Treasury yields, preventing a wider transatlantic rate gap. Yet ECB policymakers have adopted a more cautious tone recently, leaving limited room for expectations to turn more hawkish.
Higher energy prices are the greater threat. Rising natural gas costs weigh more on the eurozone than on the United States, and should Brent climb toward the $100 area, the damage to Europe's economy could outweigh any support from higher ECB rates.
Technical picture favours the bears
On the charts, EUR/USD remains confined within a bearish flag formation after its recent correction. A decisive break below the pattern's lower boundary would expose the recent swing low around 1.1324.
Below there, the 1.1300 area becomes the next objective, coinciding with the 127.2% Fibonacci extension of the March-to-April rally. On the upside, initial resistance sits around 1.1450, with a stronger barrier between 1.1480 and 1.1500. With Europe's calendar light, the pair looks set to take its cues from oil and geopolitics rather than domestic data.
Sources: FOREX.com, Reuters (snippet-based)
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