- Investors are again anticipating an interest rate hike by the European Central Bank.
- TACO has been the main driver behind the growth of EURUSD.
The US dollar failed to benefit from Brent crude rising to two-week highs and the Federal Reserve’s concerns about higher prices becoming entrenched in the US economy. Investors believe that Donald Trump’s announcement of ending the Iran deal is actually part of a negotiation strategy, or TACO (Trump Always Out of Chicken), has returned to the financial markets. At the same time, confidence in the rapid de-escalation of the conflict is pushing the dollar index lower.
Minutes from the June FOMC meeting revealed officials were concerned that the PCE rate would remain above the 2% target for too long. Although the labor market is not the main source of inflationary pressures, the Fed is concerned about how it will react to tariffs, the oil shock, and, most recently, the investment boom in artificial intelligence technologies. Officials have set out their expectations for the future, and there appears to be few divisions within the committee, as the mixed outlook on interest rates suggests.
As a result, the market interpreted the FOMC minutes as somewhat hawkish, raising the probability of a rate hike in 2026 to 84%. The probability of raising interest rates twice increased to 45%. However, this did not help the US dollar, nor did the growing demand for hedging against EUR/USD risks. The risk of a reversal in the euro’s direction has decreased significantly against the backdrop of the escalating armed conflict in the Middle East. However, the bears’ joy was short-lived.
The rise in Brent crude is likely to negatively affect the euro zone economy, which depends on energy imports. The International Monetary Fund reduced its forecast for the currency area’s gross domestic product for the year 2026 from 1.1% to 0.9%, citing the rise in oil prices compared to last year. On the other hand, the rise in North Sea crude is fueling inflation and reviving the idea that the ECB will raise interest rates more aggressively than the Fed. This was reflected in German bond yields exceeding their American counterparts.
The main drivers behind the rapid recovery of EURUSD were TACO and investors’ belief in the rapid de-escalation of the conflict in the Middle East. This was particularly the case as oil prices fell following reports that traffic through the Strait of Hormuz remained unchanged. According to Kpler, 36 tankers passed through the strait on July 6 and 41 on July 7, which is broadly in line with last week’s daily average of 40.
the So they broke Analyst team
