Fear is back, and so is the USD
At the start of the week, there were signs that tensions in the Middle East might ease. Iran appeared diplomatically isolated and was seemingly seeking a way out of the escalating conflict. However, the situation remains fluid. As the hours progress, Israel has continued to press forward with strikes targeting Tehran and other critical military sites.
Over the last year, Israeli-Iranian clashes, such as those in April and October of last year, have been short-lived. This time, however, Israel appears intent on drawing the U.S. into the conflict, and may be succeeding. According to Channel 12, Israeli officials estimate that American military involvement could begin as early as tonight. President Trump’s latest post on social media also points to a growing U.S. readiness to intervene.
Markets have reacted swiftly. WTI crude has climbed back to $75 per barrel, and for the first time since Liberation Day, traditional safe-haven dynamics are reasserting themselves. Equities have pulled back, U.S. Treasury yields have fallen, and the dollar has strengthened, gaining nearly 0.8% on the day and edging back toward its 20-day moving average of 98.9. Meanwhile, Iran has issued a fresh threat to close the Strait of Hormuz, a critical chokepoint through which roughly 20% of global oil and a sizable portion of natural gas flow.
Against this tense geopolitical backdrop, investors are also bracing for today’s Fed decision, with particular focus on the updated dot plot. The Fed’s dot plot, a quarterly visual summary of FOMC members’ rate projections. remains a key gauge of future policy direction. The March projections pointed to a year-end 2025 fed funds rate in the 3.75% to 4.0% range. But expectations have shifted. It’s now likely the Fed signals just one cut this year, down from two, highlighting its dual mandate of price stability and maximum employment.
Why the more cautious stance? While the latest inflation print surprised to the downside, uncertainty around tariff pass-through remains. Businesses are absorbing part of the cost, but not indefinitely. The Fed is likely to emphasize that the timing of inflationary effects, not their magnitude, is still the major unknown. Looking ahead, the dot plot may continue to show a gradual glide path toward the long-run neutral rate of around 3.0%, with three rate cuts penciled in for 2026 and a final one in 2027.
Fresh euro rally echoes 2017 and 2020 surges
Enough with the fundamentals – over the past few weeks, we’ve broken down the euro’s remarkable rally, covering the highs, the lows, and everything in between. But today, we’re ditching the macro talk and diving straight into the technicals. Think of this as a fresh, chart-driven take on where the euro stands.
EUR/USD’s 50-day moving average crossed above the 200-day back in mid-April — a classic “Golden Cross” pattern that signals the potential for a long-term upward price trend. In the post-GFC era, similar crossovers occurred at a few key junctures: in 2017, 2020, and 2023. But only the first two preceded meaningful and sustained rallies. In 2023, the close price fell back below the 50-day moving average in just over a month, breaking trend continuity and failing to attract further demand.
The current setup appears structurally stronger, with all signs pointing to a sustainable breakout. Even before the Golden Cross formed, early indicators were already in place: higher swing highs and lows consistently emerged from mid-February to mid-April, signaling the start of a structural price shift.
As the months progressed (since early April), EUR/USD succeeded in consistently closing above both the 50- and 200-day moving averages, securing, so far, five higher monthly closes in the last six months. This price rhythm is reminiscent of the 2017 rally, confirming the bullish momentum.
In both 2017 and 2020, EUR/USD corrected only after, respectively, four and three months of trend extension following the moving averages crossover, suggesting room for further upside in the coming weeks.
But what makes the present rally particularly compelling is its hybrid nature, sharing technical but also fundamental components of the previous two rallies. 2017 marked Trump’s first term, a period characterized by a similar ‘shift away from the dollar’ sentiment that fueled euro strength. At the same time, today’s dynamics echo 2020, as markets navigate a major macro transition—while not pandemic-driven, it reflects a broader push toward diversification away from the dollar.
Adding to this, the psychological weight of the $1.1000 level cannot be overstated. After breaking above it in 2017, this level served as a firm support for the best part of following five years. Then beginning in 2022, following the European energy crisis sparked by the war in Ukraine, the $1.1000 level flipped from a support floor to a resistance ceiling, which capped upside several times over the next few years until the most recent rally. When support becomes resistance, and price reclaims it, the breakout carries deeper significance — not just mechanically via stop orders, but also emotionally and behaviorally, as market participants interpret it as the lifting of a long-standing lid.
Overall, with the current setup echoing the best of both 2017 and 2020, the stage may be set for a more aggressive, psychologically potent euro rally.
Pound navigating a more fragile backdrop
Sterling suffered its biggest daily fall against the US dollar since early April on Tuesday. The 1.10% decline in GBP/USD was a clear reflection of how renewed geopolitical tensions are rattling markets. The surge in oil prices, driven by fears of further escalation in the Middle East, reignited risk aversion, prompting investors to rotate out of risk-sensitive currencies like the pound and into traditional safe havens. However, this morning, sterling is finding some support after UK headline consumer price index (CPI) came in at 3.4% vs. a forecast of 3.3% while core CPI held steady at 3.5%. The services inflation miss at 4.7% vs. 4.8% may temper the pound’s initial reaction, but goods prices are rising at their fastest pace in over a year.
The pound is now navigating a tricky mix of domestic policy uncertainty and global risk-off sentiment. With UK inflation still at its highest in over a year, the data reinforces concerns that price pressures remain sticky, just as the Bank of England (BoE) prepares to meet on Thursday. While a rate hold is widely expected, markets will be laser-focused on the BoE’s tone, especially in light of Brent crude’s 20% surge this month and the ongoing Middle East conflict, which could further entrench inflation via energy channels.
Despite the inflation surprise, money markets still price in a 74% chance of an August rate cut, with a second cut fully priced by year-end. That dovish outlook, combined with weaker UK data and the Fed’s higher-for-longer stance, has eroded the pound’s relative yield advantage. After an 8% rally year-to-date, GBP/USD now faces a more fragile backdrop, with geopolitical risks and central bank divergence threatening to cap further gains.
GBP/USD has pulled back sharply from 3-year highs above $1.36 and broken below its 21-day moving average in a sign that the uptrend is losing steam. The 50-day moving average, located at $1.3381, is the next key support level, below which the 100-day moving average comes into focus all the way down at $1.3064.
As for GBP/EUR, the pair continues to grind lower, down over 2.3% since its late May high of €1.1966 and falling for eight days in a row – its longest daily losing streak since the start of the pandemic in March 2020. The currency pair is now trading below all of its key daily moving averages, with little in way of strong support until €1.15.
Euro and sterling take opposite paths
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 16-20
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
