After an explosive eight?day rally, EUR/USD has moved into consolidation as markets await developments in the Middle East. Donald Trump says Washington-Tehran talks could resume as soon as the weekend and that Iran has accepted most US demands. Investors are pricing in a quick peace deal and overlooking high oil prices and the persistent risk of rising inflation.

Markets shoot first and ask questions later. For now, de-escalation in the Middle East has become a more important factor for markets than stagflation risks, which would be felt especially sharply in Europe and Asia because of those regions' dependence on energy imports.

Commodity indices and US CPI dynamics

The US faces a different problem. Even before strikes on Iran, prices across most commodity assets were rising, partly driven by Trump's tariffs. In March, oil and gas joined the rally, which will almost certainly push up US consumer prices. Second-round effects will lift core inflation as well, especially given the administration's anti-immigration stance that shrinks the labor force and gives workers more bargaining power to demand higher pay.

In one of his recent remarks, Jerome Powell said the Fed will not cut rates if the disinflationary trend breaks — and it's likely to break. Thus, market forecasts that expect no policy changes through year-end look logical.

Market expectations for the federal funds rate

If geopolitical tensions are resolved, investor focus will return to interest rates. The futures market currently prices in two ECB rate hikes in 2026 with about a 30% chance of a third. Bloomberg's sources say the Governing Council will do nothing in April.

In reality, the ECB should avoid worsening a potential economic downturn. Since the US and Israeli strikes on Iran, oil is up about 60%, and gas has surged about 90%. Bloomberg Economics has cut its euro area Q1 growth forecast from 0.5% to zero. A deposit rate hike in these conditions would be a political mistake by Christine Lagarde and her colleagues.

Borrowing costs may remain unchanged, and current expectations of hikes could work against the euro. Indeed, if the Fed-ECB rate differential does not narrow, it makes sense to sell the main currency pair now.

Technically, on the daily chart, EUR/USD is in short-term consolidation after a prolonged rally. It makes sense to place pending buy orders on a break above the upper band of the 1.1765–1.1825 trading range, and to sell if support at 1.1765 is successfully breached. In the first case, the risk of a rally to 1.1950 rises; in the second, the odds of a pullback to 1.1715 increase.