EUR/USD Weekly Forecast: Stagflation fears mount as Iran conflict remains unsolved

The EUR/USD pair finished the last week of May at around 1.1660, barely up compared to the previous week’s close. The US Dollar (USD) shed some ground on the back of hopes, but losses were limited by persistent speculation that the Federal Reserve (Fed) will have no choice but to hike interest rates before year's end.

The song remains the same

Financial market activity revolved once again around war-related headlines. The Middle East crisis led the way, with sentiment staying positive at the beginning of the week but deteriorating later amid headlines of back-and-forth attacks between the United States (US) and Iran. By Thursday, however, news that they had reached an agreement on a Memorandum of Understanding to extend the ceasefire for 60 days, open the Strait of Hormuz, and start nuclear talks revived the positive mood and maintained the USD under selling pressure.

There is, however, a caveat: US President Donald Trump has yet to approve it, while Iran’s authorities claim the memorandum is not yet finalized. Even further, Iran's top negotiator Mohammad Baqer Qalibaf said on Friday that they have no trust in guarantees or words, and added: "Only actions are the measures, no action will be taken before the other side acts." Also on Friday, President Trump said that the naval blockade will be lifted and ships caught in the Strait of Hormuz may start the process of "heading home."

Nevertheless, cautious optimism prevails.

Gearing up for central banks

The US Fed and the European Central Bank (ECB) will announce their monetary policy decisions in roughly two weeks, and market players are already gearing up for it. Recent data shows the hike path is more likely day after day, as inflation keeps running above the central bank’s goals.

In the US, inflation rose at an annualized pace of 3.8% in April, up from 3.5% in March, according to the Personal Consumption Expenditures (PCE) Price Index. The core PCE Price Index rose 3.3% as anticipated. The Fed’s favorite inflation gauge is at its highest in roughly two years, and has been above the central bank’s goals since March 2021.

Continued and rising inflationary pressure, alongside the lack of material progress on the war front - the latest major source of inflation - pushes speculative interest into betting on interest rate hikes.

Across the pond, things are slightly better, but still worrisome: Germany published the preliminary estimate of the May Consumer Price Index (CPI), which rose 2.6%, easing from the 2.9% posted in April. The Harmonized Index of Consumer Prices, the ECB’s preferred inflation reading, declined 0.1% on a monthly basis and rose 2.7% on a yearly basis. Market players are already pricing in a rate hike when European policymakers meet in June.

Stagflation fears rise, employment taking center stage

Other than that, the US downwardly revised the Q1 Gross Domestic Product (GDP) estimate to 1.6% from the first calculation of 2%.

While far from confirmed, the stagflation ghost hovers over all major economies as inflation keeps rising while growth becomes tepid.

The first week of June will revolve around the second leg of the Fed’s mandate: employment. The US will release the April JOLTS Job Openings report, the monthly ADP survey on Employment Change, Challenger Job Cuts, and weekly unemployment claims ahead of the May Nonfarm Payrolls (NFP) report scheduled for Friday.

Growth-related data will also make it to the wires, as ISM will release the Services and the Manufacturing Purchasing Managers’ Indexes (PMIs) for May.

Germany and the Eurozone will publish Retail Sales updates, while the Euro bloc will unveil the preliminary estimate of the HICP also for May, expected to hit 3.3% YoY, after posting 3% in April. Such an outcome or a higher one will result in market participants fully pricing in an interest rate hike by the ECB in June. Finally, the Eurozone will publish a second estimate of the Q1 GDP, expected to be confirmed at 0.1% QoQ.

The macroeconomic calendar will also include some Fed and ECB speakers, the last round of testimonies ahead of the central banks’ announcements later in the month.

EUR/USD Technical Outlook:

Technically, the EUR/USD pair is losing its bearish strength, although the risk remains skewed to the downside. The daily chart for the pair shows it is trading below all its moving averages, with the 20-day Simple Moving Average (SMA) gaining downward strength and providing resistance at 1.1675, while slowly grinding below the 100-day SMA at 1.1698 and the 200-day SMA at 1.1683. The SMAs cluster provides resistance, limiting the bullish potential of EUR/USD. At the same time, the Momentum indicator remains directionless in negative territory, while the Relative Strength Index (RSI) indicator oscillates around the neutral 50 line, hinting that recovery attempts are likely to face supply on shallow bounces.

In the weekly chart, EUR/USD remains well above the 100- and 200-week SMAs at 1.1266 and 1.0966, respectively, yet with the upside limited by a flat 20-week SMA at 1.1690. Technical indicators ticked north but remain in negative territory, signaling easing selling pressure yet not enough to support additional gains ahead. Near-term support comes at 1.1620, ahead of the 1.1560 region. Additional declines expose 1.1470, a long-term static support level.

Near-term support comes at 1.1620, ahead of the 1.1560 region.(The technical analysis of this story was written with the help of an AI tool.)