The Euro (EUR) surged sharply against the US Dollar (USD) on Tuesday after President Donald Trump announced a “complete and total ceasefire” between Israel and Iran. The EUR/USD pair jumped over 1.1600, approaching its year-to-date high of 1.1630, as market participants reacted to the reduced geopolitical tensions with a wave of risk-on appetite.
The rally represents a 1.3% intraday jump from the lows on Monday, and breaks the top of a bullish flag chart pattern, with upside targets at 1.1630 and 1.1700.
Market Relief as War Risks Fade
After 12 days of intense hostilities and a weekend US strike on Iran’s nuclear facilities, investors welcomed signs of de-escalation. Despite Iran launching missiles at Israel early Tuesday and ongoing rhetoric from Tehran, markets largely interpreted the ceasefire announcement as a turning point, prompting capital flows back into risk assets.
Meanwhile, oil prices collapsed, with WTI crude dropping 13% on Monday and another 3% early Tuesday, falling to $63 per barrel. This comes as a relief for the Eurozone, which is a net crude importer, and helps ease inflationary fears amid a fragile economic recovery.
USD Weakened by Risk Rally and Dovish Fed Expectations
The U.S. Dollar Index (DXY) dropped more than 1%, wiping out virtually all the gains it had made over the past two weeks as safe-haven demand abated and traders started pricing in a cut in Federal Reserve interest rates.
As dovish commentary from Federal Reserve officials, such as Governor Christopher Waller and Michelle Bowman, continued to build momentum for expectations, Fed funds futures were implying a 22% chance of a July cut, which was up from 14% last week, and over an 80% chance of a cut in September, which was up from a 70% chance previously.
Market participants were now focusing their attention on Fed Chair Jerome Powell’s testimony before Congress, when he will have more opportunity to address concerns regarding weakening growth and persistent inflation.
EUR/USD Eyes Further Upside Amid Geopolitical Calm
Although the Eurozone flash PMIs for June, which registered slightly lower than expected takeaways – Manufacturing at 49.4 and Services at 50.0 – the Euro continued to climb as some geopolitical tensions ebbed and the macro shortfall eased.
Next up are German IFO sentiment data and enormous ECB comments for future directional hints. From a technical perspective, EUR/USD confirmed a bullish flag breakout today after going through a trendline resistance at 1.1540. The 1st significant upside level is at 1.1630 (high on June 12), and the next major upside level is at 1.1700 (127.2% Fibonacci extension).
Immediate support is at 1.1535, and 1.1445 takes us somewhat deeper. The 14-day RSI has turned up and is making higher highs, but has yet to reach overbought levels, leaving room for further upside given that the market sentiment remains favourable.
Conclusion
As the geopolitical threat fades and the Fed is expecting to pivot dovish, the EUR/USD outlook remains bullish in the near term. A substantial break above 1.1630 may open the door to a retest of multi-year highs if Powell is non-destructive to risk assets and if Treasury yields continue to ease lower.
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