Review of forecasts against the backdrop of geopolitical risks. Overview of institutions
Current Macro Situation in the FX Market: Review by ING, MUFG and Investing Live
Geopolitical tensions in the Middle East following the escalation of the conflict between the US and Iran have become a key driver for financial markets. A sharp rise in energy prices, changing expectations for US interest rates, and new macroeconomic data have provided short-term support for the dollar. Leading institutions — ING, MUFG, and Investing Live analysts — agree that the future dynamics of currencies will depend on the duration of the conflict and its impact on inflation and monetary policy.
ING: Energy Shock Supports the Dollar
ING analysts believe that the current strengthening of the dollar is primarily caused by a sharp rise in energy prices. The energy shock affects the foreign exchange market through several channels.
The first channel is the deterioration of trade balances in energy-importing countries. During the 2022 energy shock, the Eurozone's trade deficit reached almost €50 billion per month, while the US benefited from greater energy independence.
The second channel is a change in expectations regarding the Federal Reserve's policy. Rising energy prices amplify inflationary risks, forcing markets to revise the pace of future rate cuts.
The third channel is global stagflationary risk. Before the conflict, investors actively increased positions in European assets and emerging markets. Rising energy prices are forcing investors to re-evaluate these positions and return capital to the dollar.
ING emphasizes that the key factor for the FX market will be the duration of the energy shock. If the situation stabilizes within a few weeks, the dollar may lose some of its gains.
In the short term, ING expects EUR/USD to hover around 1.15–1.16, but if energy markets stabilize and the Fed cuts rates in the second half of the year, the pair could rise to 1.22 by year-end.
MUFG: Geopolitical Uncertainty and Strong US Data Support the Dollar
MUFG analysts note that the dollar continues to strengthen amidst rising geopolitical risks. Uncertainty regarding the duration of the conflict remains high. According to the US Secretary of Defense, military operations could last from three to eight weeks, while Israeli officials state that Iran retains significant military capabilities.
In addition to geopolitics, the dollar received support from strong US economic data. The latest ISM Services PMI showed business sentiment rising to its highest level since July. The new orders component rose by 5.5 points, and the employment index climbed to 51.8, the highest value since February last year.
Against the backdrop of stronger macro data, the market began to reduce expectations for Fed rate cuts. Currently, approximately 42 basis points of easing are priced in by year-end, whereas previous expectations were around 61 basis points.
If expectations for rate cuts continue to diminish, the dollar may receive additional support.
At the same time, MUFG recalls that during the 2022 energy shock, the dollar significantly strengthened due to aggressive Fed rate hikes — by approximately 425 basis points. Currently, monetary policy is already considered restrictive, so the potential for a new sharp strengthening of the dollar may be more limited.
Investing Live: Strong US Macro Data and Energy Shock Change Market Expectations
According to Investing Live analysts, the dollar significantly strengthened after the start of the conflict between the US and Iran, as investors sought safe-haven assets.
However, the main factor was that markets began to realize that Fed rate cuts might occur later than expected. Rising oil prices create additional inflationary pressure.
An additional factor was the publication of the ISM Manufacturing PMI, which showed stronger-than-expected results. The prices index in the report rose to its highest level since 2022, indicating persistent inflationary pressure.
As a result, traders began to reduce expectations for Fed policy easing. The market currently prices in approximately 45 basis points of rate cuts by year-end, whereas at the end of last week, expectations were around 58 basis points.
Eurozone: Inflation Rising Again
On the European side, the macroeconomic picture remains relatively stable, but the energy shock is beginning to affect inflation expectations.
Recent data showed that Eurozone inflation exceeded expectations, which, coupled with rising energy prices, is leading markets to partially price in the possibility of an ECB rate hike.
Markets currently estimate:
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approximately 21% probability of a rate hike in June
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around 50% probability of a hike by year-end
At the same time, European Central Bank officials urge not to react too quickly to events in the Middle East, as similar energy shocks in the past often proved temporary.
Technical Picture of EUR/USD
From a technical perspective, the key level for the EUR/USD pair remains the 1.1575 zone.
On the daily chart, this zone acts as an important support level. If buyers hold it, a recovery towards 1.18 is possible.
In case of a break of this level, sellers may increase pressure on the pair with a potential target around 1.14.
On shorter timeframes, the downward momentum formed by the descending trendline persists. A break above it could open the way for growth towards 1.1740.
Key Macro Data of the Week
Major macroeconomic events in the coming days:
Friday
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Non-Farm Payrolls
However, this week, the significance of macro data may be partially diminished due to the dominance of the geopolitical factor.
Conclusion
Currently, the foreign exchange market is influenced by two main factors:
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Geopolitical tensions in the Middle East
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Revised expectations for Federal Reserve policy
As long as energy prices remain high, the dollar receives additional support. At the same time, the duration of the conflict will be a key factor for the medium-term dynamics of currencies.
If the conflict proves short-lived, the dollar may gradually lose some of its positions. However, in the event of a prolonged energy crisis, markets may face a new period of a stronger dollar and increased volatility in global financial markets.