By Antonio Di Giacomo, Senior Market Analyst at XS.com
The EUR/USD pair continued its significant recovery at the start of the week, reaching the 1.1570 area, driven by the weakness of the U.S. dollar. This move comes against the backdrop of the greenback losing its appeal as a safe-haven
asset, favoring stronger demand for the euro in international markets.
The main catalyst behind this advance has been the shift in global risk sentiment. Growing expectations of a potential ceasefire in the Middle East have significantly reduced risk aversion, weakening the dollar‘s demand. This backdrop has
encouraged more aggressive positioning in higher-risk assets, including European currencies.
In this context, diplomatic progress between the United States and Iran has been key in stabilizing markets. A possible structured agreement has even been discussed, which could lead to an immediate ceasefire and the reopening of the Strait of
Hormuz in the short term, further improving global risk appetite.
Despite U.S. President Donald Trump maintaining a firm stance toward Iran, markets have chosen to focus on signals of negotiation and de-escalation. This perception has allowed risk assets, including equities and currencies like the euro, to find support in an environment that remains geopolitically uncertain but less tense.
Additionally, recent U.S. economic data has added further pressure on the dollar. The decline in the ISM services PMI, which came in below market expectations, has reinforced the narrative of slowing economic activity, limiting the Federal Reserve’s room to maintain a restrictive monetary policy for longer.
This weakening of the dollar is reflected in reduced demand for it as a safe-havenasset, especially amid moderating geopolitical risks. Historically, the dollar tends to appreciate during periods of uncertainty, but when markets shift into a ‘risk-on” mode, it loses traction against currencies like the euro.
On the other hand, the technical behavior of EUR/USD also supports this short-term bullish move. The pair remains above key technical levels and important moving averages on intraday timeframes, suggesting a moderate recovery, though it is still within a broader consolidation structure on higher timeframes.
However, significant risks remain that could limit the euro’s advance. Uncertainty surrounding the reopening of the Strait of Hormuz, as well as potential surprises in upcoming U.S. inflation data, could trigger renewed volatility and support the dollar if the macroeconomic context shifts.
At the same time, the market continues to closely monitor energy prices, a key factor for the European economy. A sustained rise in oil prices could pressure the euro through higher energy costs and a deterioration in the region’s growth outlook.
In conclusion, EUR/USD maintains a short-term bullish bias, driven by dollar weakness and a more favorable global risk environment. However, this move is built on fragile foundations and is highly dependent on geopolitical developments and U.S. macroeconomic data. As long as optimism around a potential ceasefire persists, the euro may continue to find support, though structural and monetary risks still limit the pair’s upside.
