Euro recovers as easing Middle East tensions boost risk appetite
The euro is recovering after coming under pressure during the recent escalation of tensions in the Middle East. The single currency is benefiting from an improvement in global risk sentiment as markets respond positively to signs of de-escalation between the United States and Iran.
Reduced demand for safe-haven assets has weighed on the US dollar, allowing EUR/USD to rebound from recent lows and recover part of the losses recorded over the past few weeks.
ECB policy remains a key driver
Additional support for the euro comes from the European Central Bank's relatively hawkish stance. Although the ECB has recently maintained a cautious tone, policymakers continue to stress that future decisions will remain data-dependent. Market participants are closely monitoring incoming inflation and growth figures, as expectations regarding the ECB’s policy path remain one of the main drivers of euro performance. However, the lack of clear signals pointing to further policy tightening continues to limit the upside potential of the single currency.
Dollar still retains underlying support
Despite the current recovery in the euro, the broader outlook remains mixed. Investors remain focused on the Federal Reserve and the prospect of US interest rates staying elevated for longer. Resilient US economic data continues to support the dollar, limiting the scope for a sustained EUR/USD rally. Several major financial institutions maintain a cautious outlook on the euro for the second half of the year, citing the US yield advantage and lingering concerns over eurozone growth prospects.
What’s next for EUR/USD?
In the near term, EUR/USD is likely to be driven by three key factors: developments in the Middle East, signals from the Federal Reserve, and incoming eurozone inflation data. As geopolitical tensions ease, the euro has room to extend its recovery. However, a more sustainable bullish trend would require further evidence of economic resilience in the eurozone and a narrowing of the interest rate differential between the ECB and the Fed.
Near-term outlook
The return of EUR/USD above the 1.1590–1.1600 area is a constructive signal for bulls. However, further gains toward the 1.1660–1.1680 region will depend on the pair’s ability to hold above 1.1590, which has once again become an important support level. A break below this area could trigger a pullback toward 1.1560–1.1540. As noted previously in Euro gains on ECB rate hike and hopes for Iran de-escalation, the current recovery may still present selling opportunities unless stronger bullish catalysts emerge.
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