What is complex turns out to be simple, and what is simple becomes complex. When Donald Trump appointed Kevin Warsh as Chairman of the Federal Reserve, traders received a logical strategy—buy Treasury bonds and sell the US dollar on expectations of rate cuts. However, market sentiment quickly shifted in the opposite direction. The dynamics of the US Treasury yield curve signal risks of tightening monetary policy. This allows the "bears" in EUR/USD to advance.

Dynamics of the Treasury Yield Curve

According to MUFG, Warsh may push the FOMC towards monetary expansion, but most officials are unlikely to heed him. Indeed, strong employment data from April signals stabilization in the US labor market. At the same time, a rise in consumer prices to 3.8% and core inflation to 2.8% compels the Fed to consider increasing the federal funds rate.

Against this backdrop, the "hawkish" rhetoric from European Central Bank officials and the pleasant surprise from the German investor sentiment index fade. Encouraged by the potential for a peace agreement between the US and Iran, ZEW respondents raised their business sentiment prospects. Current conditions continued to deteriorate.

Dynamics of Investor Sentiment in Germany

MUFG claims that EUR/USD bulls should not get carried away by this. The historical pattern seems to spiral. The euro was expected to drop significantly, as it did at the beginning of the armed conflict in Ukraine.

The primary reason for the regional currency's resilience is the absence of the energy crisis that plagued 2022. Gas prices have not risen as high as they did four years ago. However, the depletion of blue fuel reserves could cause the main currency pair to stumble into old pitfalls — falling to parity.

Pressure on EUR/USD could stem from the plummeting political ratings of German Chancellor Friedrich Merz. He was met with jeers in parliament after presenting a strict austerity proposal involving cuts to healthcare spending and a structural overhaul of the pension system. Attempts to bring order to the coalition and his own party have yet to yield positive results. Merz risks following in the footsteps of Keir Starmer, whose position as Prime Minister of Britain has become shaky, leading to sell-offs in the pound.

Neither the economy nor politics is in favor of the euro. The US dollar, by contrast, may benefit from rising oil prices and accelerating inflation. As long as the Strait of Hormuz remains closed, the probability of Brent prices increasing is much higher than the chances of them decreasing. This power dynamic in the oil market risks igniting US inflation and prompting the Fed to raise rates.

Technically, the EUR/USD is continuing to trade within the fair-value range of 1.1680-1.1780 on the daily chart. The bulls' failed attempts to breach the upper boundary of the trading channel have been ongoing for 5 days now. A drop in the euro below $1.1735 will provide a reason for selling.