At the start of the trading week, EUR/USD initially showed a decline of nearly 1.00%. However, the move soon began to reverse in the short term, and the pair has since entered a phase of consistent short-term neutrality.
It is important to note that despite this recent stabilization in EUR/USD, geopolitical tensions in the Middle East remain elevated, and the outlook for US monetary policy continues to reflect a neutral stance. These factors have played a key role in supporting the strength observed in the US dollar and could continue to act as catalysts for potential selling pressure in EUR/USD in the short term.
Retaliations continue
Over the past weekend and in recent days, the conflict in the Middle East has continued to intensify, with ongoing missile and drone attacks from the parties involved. Iran has even appointed a new Supreme Leader, signaling that the current government is not preparing for an early exit from power. This has reinforced perceptions of an active and prolonged regional crisis in the short term, increasing uncertainty to the point that WTI crude oil has reached levels near $120 per barrel, a price not seen since 2022.
That said, the steady demand for US dollars observed at the beginning of the conflict has begun to moderate in the short term. This is largely due to the absence of significant movements in US bond yields that would otherwise reinforce stronger demand for the fixed-income market and, consequently, for the dollar.
Indeed, the DXY index, which measures the dollar’s strength against its major peers, has paused around the 99-point area and begun to show signs of neutrality. This suggests that, despite ongoing political tensions, demand for dollars has stabilized in the short term — partly due to caution and partly because the safe-haven repositioning had already occurred in prior sessions.
Source: TradingEconomics
Taking all of this into account, market caution appears to have settled in the short term. For now, there is no strong demand for either dollars or euros following recent geopolitical developments. Unless a new event significantly increases risk perception, EUR/USD is likely to remain in a consistent phase of indecision in the coming sessions.
However, it is important to remember that each major escalation of the current conflict has tended to renew demand for US dollars, which have so far acted as the market’s preferred safe-haven currency. If another significant escalation occurs, dollar appetite could reemerge, potentially leading to renewed selling pressure on EUR/USD in the short term.
What is the central bank outlook?
At present, the European Central Bank shows a 99.3% probability that the deposit rate will remain at the current 2.00% level. Furthermore, at least through the September meeting, there remains more than an 80% probability that no significant rate changes will occur in the short term. This reflects that the ECB’s stance remains neutral and could persist over the coming months.
Source: ECBWATCH
Meanwhile, Federal Reserve probabilities have also aligned toward a neutral rate outlook. Markets currently price in more than a 97% probability that the rate will remain at 3.75% for the March 18 meeting, and there is over a 40% probability that this same stance could remain in place at least through July 2026. This is notable considering that only weeks ago the market expected potential rate cuts as early as June this year.
Source: CMEGROUP
With this in mind, both central bank probability tables now reflect a broadly neutral monetary policy outlook for much of 2026. In this environment, the interest rate differential regains importance: while the United States maintains a rate of 3.75%, the eurozone deposit rate stands at 2.00%. This suggests that dollar-denominated investments may remain relatively more attractive than euro-denominated assets.
This differential could become a relevant fundamental catalyst, potentially triggering more consistent dollar demand and contributing to sustained selling pressure in EUR/USD over the medium term.
Technical Outlook for EUR/USD
Source: StoneX, Tradingview
- Bearish move emerges: Although EUR/USD has largely traded within a broad sideways channel in recent months, a pattern of lower highs has recently begun to form, giving way to a potential short-term downward trendline. If selling pressure stabilizes, this emerging structure could persist in the coming sessions. Should this new trendline break the broader sideways formation that has held for months, it could signal a structural shift in the chart and open the door to a more consistent bearish trend.
- RSI: The RSI remains below the neutral 50 level, suggesting that average selling momentum over the past 14 sessions remains relevant. However, as the indicator approaches the 30 oversold level, it may begin to signal excessive bearish pressure, potentially opening the door for short-term corrective rebounds.
- MACD: The MACD histogram remains below the zero line, indicating that short-term moving average momentum remains in bearish territory and supports the prevailing downside bias in EUR/USD.
Key Levels:
- 1.17656 – Key resistance: This level aligns with the emerging downward trendline and sits near the 50-period simple moving average. A sustained break above this area could invalidate the developing bearish structure and restore dominance to the broader sideways channel that has prevailed in recent months.
- 1.16709 – Near-term barrier: A neutrality zone aligned with the 200-period simple moving average. This level could act as a reference point for potential short-term corrective rebounds.
- 1.15069 – Major support: This level corresponds to the most relevant lows of recent months. A sustained break below it could consolidate a dominant bearish bias and lead to the formation of a stronger downward trend in the coming weeks.
Written by Julian Pineda, CFA, CMT – Market Analyst
Follow him on: @julianpineda25
