EUR/USD Weekly Forecast: War escalation can bring back US Dollar demand

The EUR/USD pair settled in the 1.1580 area marginally higher in the week, yet unable to find a clear path. The pair holds near its August peak at 1.1581, as demand for the US Dollar (USD) remains subdued amid poor employment figures and steady inflation.

Contributing to the lack of directional strength, the United States (US) and Iran remain in a stalemate, without attacking each other or negotiating a way out.

Middle East crisis

At this point, the key is that the Strait of Hormuz remains closed and both Tehran and Washington claim to have it under control. The truth is, traffic through the sea passage is severely disrupted, resulting in higher Oil prices and fears that higher energy prices will soon spill back into inflation.

US Treasury Secretary Scott Bessent has threatened Iran with economic isolation “like the world has never seen before,” as the US maintains its demand for Iran to drop all nuclear weapons. Tehran, on the other hand, demands sole control of the Strait of Hormuz, while claiming it will not end its fight in the Middle East until President Donald Trump is out of office in 2029.

Other than that, the Memorandum of Understanding (MoU) signed in June is set to expire on Sunday. And while some tit-for-tat fire took place and talks were interrupted, there were no major strikes that could fuel concerns. That may come to an end without the MoU in the way.

US data keeps Fed’s hike odds subdued

The macroeconomic calendar was pretty scarce in the past week, with one major exception: the US released the July Consumer Price Index (CPI). Annual inflation, as measured by the change in the CPI, declined to 3.4% in July from 3.5% in June, in line with market expectations. In fact, all figures matched expectations, with core annual CPI printing at 2.5%, down from 2.6% posted in June. The figures supported the case for an on-hold Federal Reserve (Fed) in September, limiting USD demand.

Other data showed that Retail Sales were up 5% in July, while the June reading was upwardly revised to 6.8%. Finally, the preliminary estimate of the August Michigan Consumer Sentiment Index contracted to 51 from the 55.2 posted in July. The same report showed inflation expectations on a 1-year perspective ticked higher, to 4.3% from 4.2%, while the 5-year view remained unchanged at 3.3%.

European slow macroeconomic growth

The Euro was unable to attract investors amid the lack of a fresh catalyst. On the one hand, Germany confirmed the Harmonized Index of Consumer Prices (HICP) at 2.8% YoY in July as previously estimated. On the other hand, the Euro area released the second estimate of the Q2 Gross Domestic Product (GDP), reporting quarterly growth at 0.4%.

The figures reaffirmed the market’s conviction that the European Central Bank (ECB) will hike the benchmark interest rate by 25 basis points (bps) in the upcoming September meeting. At the time of writing, hike odds stand at 90%, according to the ECB Watch tool.

What’s next

War developments could be at the top of the market movers in the upcoming days, particularly if any party involved decides to resume attacks. And it's not just about the US or Iran. Israel, Saudi Arabia, Iraq and Oman are lately making it to the headlines amid rising tensions over the usage of the Strait of Hormuz.

A war escalation that pushes Oil prices further up will likely revive demand for the safe-haven USD, mostly because it would also push up Fed hike odds.

Data-wise, there’s little to take care of: Germany will publish the August ZEW Survey on Economic Sentiment, while ECB President Christine Lagarde will be on the wires on Wednesday, and the Federal Open Market Committee (FOMC) will release the Minutes of its July meeting. On Friday, S&P Global, alongside local banks, will publish the preliminary estimates of the August Purchasing Managers’ Indexes (PMIs) for European economies and the US.

EUR/USD Technical Outlook:

From a technical standpoint and according to the daily chart, EUR/USD trades at 1.1582. The pair holds is bullish. It advances above the 100-day Simple Moving Average (SMA) at 1.1568 and the 20-day SMA at 1.1482, but remains capped by the 200-day SMA at 1.1630. Momentum stays constructive, with the 14-period Relative Strength Index (RSI) indicator heading north at 63 and the 14-period Momentum indicator firmly positive above its midline, which suggests buyers still have the upper hand while the 200-day SMA acts as an inmediate ceiling at 1.1630.

In the weekly chart, EUR/USD is more neutral. The pair remains above the 20-, 100- and 200-week SMAs at 1.1569, 1.1321 and 1.1050 respectively, now advancing above the shorter one for the first time since last May. Still, the the Momentum indicator aims modestly lower in negative territory and a the RSI indicator hovers around 51 suggesting only subdued upside pressure rather than an aggressive bullish trend.

On the topside, initial resistance is located at the 200-day SMA at 1.1630, and a sustained break above this level would open the door to further gains intially towards the 1.1700 mark. On the downside, immediate support emerges at the 1.1560 region, followed by the more relevant 1.1470 price zone.

(The technical analysis of this story was written with the help of an AI tool. Know more.)