The deadlock in U.S.-Iran relations has finally been recognized by financial markets, and the European Central Bank has been the first to realize that "hawkish" rhetoric is needed to calm investors. The complex geopolitical situation in the Middle East and statements from Governing Council members about an impending hike in deposit rates have slowed the decline of EUR/USD.

It has long been known that Donald Trump changes his mind as often as he changes his gloves. The U.S. president threatens to wipe Iran off the map one moment and then postpones orders for bombings the next. He claims that the end of the armed conflict is near, only to later ponder when new U.S. missiles will fly toward Tehran. Iran promises to respond forcefully to the resumption of hostilities, threatening to extend the conflict beyond the Middle East. Should Turkey and Cyprus prepare for war?

Nonetheless, the Strait of Hormuz remains blocked, so the chances of Brent prices rising are much greater than falling. This creates a favorable environment for the U.S. dollar, along with the rise in global bond yields to their highest levels since the global economic crisis of 2008.

Dynamics of Global Bond Yields

According to the dollar smile theory, the greenback strengthens in two scenarios: when things are going well and when they are going poorly. Mass tightening of monetary policy could trigger a recession in the global economy, which is very negative. As a result, demand for the dollar, which serves as a safe-haven asset, surges.

In such a scenario, whoever first starts discussing rate hikes will save their currency. According to ECB Governing Council member Pierre Wunsch, the ECB will initiate a tightening cycle as early as June, provided the armed conflict in the Middle East has not ended by then. The official believes the futures market forecasts of three acts of monetary tightening in 2026 are justified.

Dynamics of European Business Activity and Inflation

New Banque de France Governor Emmanuel Moulin stated that the ECB should prepare for a tightening of monetary policy. However, final decisions will depend on the state of the economy in the currency bloc.

In contrast, Federal Reserve representatives are not in a hurry to employ "hawkish" rhetoric. Federal Reserve Bank President Anna Paulson believes that the federal funds rate should be maintained in the current situation. Monetary policy at this borrowing level slightly restrains the economy and slows down inflation. However, evidence of a slowdown in consumer prices is needed to return to a cycle of monetary expansion.

Unlike this official, the futures market assigns a 55% probability of a rate hike in 2026.

Technically, on the daily chart, the EUR/USD pair continues its southward march. A decisive break of support at 1.1585 would provide grounds for increasing previously established shorts in the main currency pair.