Geopolitics, the rally in oil prices, and rising Treasury yields have taken a back seat ahead of the ECB meeting. Markets are looking for signals that the ECB could raise interest rates in September, supporting the EUR/USD pair. However, will traders start selling once those expectations become reality? Let’s examine the outlook and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The EUR/USD pair is rising despite unfavorable market conditions.
- The euro is being bought on rumors of ECB action.
- Kevin Warsh’s remarks are creating uncertainty.
- Short trades on the EUR/USD pair can be opened on a rebound from 1.145 and 1.147.
Daily Fundamental Forecast for Dollar
Markets appear to be tuning out geopolitics, Kevin Warsh’s brief remarks, and Donald Trump’s rhetoric. Instead, investors are focusing on what they understand best—monetary policy. Expectations of a hawkish tone from the ECB at its July meeting are supporting the EUR/USD pair despite an unfavorable backdrop. Under normal circumstances, an escalation of conflict in the Middle East, falling equity markets, soaring oil prices, and rising US Treasury yields would strengthen the US dollar. This time, however, the market reaction has been different.
Houthi attacks on commercial shipping in the Red Sea have pushed Brent crude above $96 per barrel. The oil market has evolved into a broader supply crisis. In addition to disruptions in the Strait of Hormuz and the Bab el-Mandeb Strait, Russian and Kazakh oil exports have come under pressure following Ukrainian drone attacks on Black Sea infrastructure. Such geopolitical tensions would typically support the US dollar as a safe-haven asset, while higher oil prices tend to reinforce its appeal as the currency of a net energy exporter.
Brent Price and Market Expectations for ECB Interest Rate
Source: Nordea Markets.
However, the euro has a powerful advantage of its own. The higher Brent crude climbs, the greater the risk of accelerating inflation in the eurozone—and the stronger the case for tighter ECB monetary policy. While markets do not expect a deposit rate hike in July, the probability of a single hike in September is estimated at 90%, with the probability of two rounds of monetary tightening in 2026 standing at 60%. The corresponding figures for the Fed are 77% and 56%. This gap in policy expectations is supporting the EUR/USD.
The ECB meeting is now the market’s main focus, with the outcome due in just a few hours. If Christine Lagarde abandons her previous view that inflation risks are balanced, investors are likely to interpret it as a signal that further monetary tightening is approaching. At the same time, the ECB has until September to assess developments in the Middle East. Should Brent crude climb above $100 per barrel by then, the Governing Council could come under increasing pressure to raise interest rates.
Market Expectations for Fed Interest Rate
Source: Bloomberg.
However, the markets do not share the same confidence regarding the Fed. The probability of a federal funds rate hike in July is estimated at 35%, while the probability of the rate remaining unchanged is 65%. There hasn’t been such a significant gap since September 2024, when the Fed was choosing between raising borrowing costs by 25 or 50 basis points.
Nevertheless, nearly a week remains before the FOMC meeting, so investors’ attention is focused on the Governing Council meeting. Will the ECB meet market expectations?
Daily Trading Plan for EUR/USD
The EUR/USD pair’s rally despite an unfavorable backdrop reflects the classic “buy the rumor, sell the news” dynamic. Unless the geopolitical situation changes dramatically, a move toward the 1.145–1.147 resistance zone, followed by a reversal below those levels, could provide an opportunity to form short positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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