EUR/USD weekly outlook: US-Iran re-escalation and CPI in focus

The EUR/USD ended the week on the back foot, surrendering its earlier poise during Friday’s session. From mid-week until that point, the pair had displayed a rather unexpected degree of composure, even as tensions in the Middle East flared up again. A sharp rebound in crude oil swiftly changed the market narrative by mid-week, herding investors back into cautious, defensive trades. By the final stages, however, the mood had darkened.

All eyes on US-Iran tensions again

At the weekend, there was further escalation of tensions. The US initiated a new series of airstrikes in Iran after the IRGC forces targeted a vessel navigating the Strait of Hormuz. This strategic waterway, crucial for global oil shipments, has now been declared closed by IRGC until further notice, and launched attacks on American military bases and their regional allies.

Retaliation from Tehran was inevitable, and one can easily imagine the situation spiralling quite rapidly. Of course, rhetoric can soften. We’ve seen that movie before.

But for now, traders are forced to assume the worst. That means the dollar continues to benefit from its dual role as both a high-yielder and a safe harbour, while the euro—particularly vulnerable given Europe’s energy import dependency—remains on the back foot. Stagflation fears, never far from the surface, are once again creeping back into the conversation.

CPI and Warsh Take Centre Stage

Geopolitics aside, this week’s calendar is anything but quiet. All eyes turn to Wednesday’s US CPI release and Fed Chair Kevin Warsh’s congressional testimony. With energy prices now firmly elevated, the inflation data takes on added significance. The risk skew is clearly tilted toward a hotter print, which would reinforce the narrative that the Fed may need to keep rates restrictive for longer—or even hike again later this year.

If that scenario plays out, expect US Treasury yields to push higher, further widening the interest rate differential that has been one of the dollar’s strongest pillars.

Technical EUR/USD outlook and levels to watch

On the charts, the picture remains cautious. EUR/USD is carving out what looks increasingly like a bear flag on the daily timeframe—a continuation pattern that suggests the recent consolidation is just a pause before another leg lower.

Key levels to watch:

• Support: The 1.1400 zone remains the immediate line in the sand. A clean break below could open the door to 1.1300 fairly quickly.
• Resistance: On the upside, 1.1450 continues to cap rallies. A move above that would shift focus to 1.1500, with 1.1575 as the next meaningful hurdle.

For now, the path of least resistance still points south.

The Bottom Line

Unless we see a meaningful shift in the fundamental landscape—be it a sharp drop in oil prices, or a string of weak US data—the dollar’s yield advantage and safe-haven status are likely to keep any EUR/USD rallies well-contained. The near-term bias remains cautiously bearish, with geopolitics and inflation data set to dictate the next move.