The euro-dollar pair is demonstrating sideways movement amid ongoing geopolitical uncertainty. On one hand, global media outlets are actively publishing insider reports suggesting that the U.S. and Iran are very close to finalizing a preliminary deal that would allow for the restoration of shipping in the Strait of Hormuz. On the other hand, U.S. military forces struck missile installations and boats in southern Iran on Monday, which were allegedly attempting to lay mines. Formally, a ceasefire is still in place, but the prospects of signing a peace agreement are in question.

Traders in the EUR/USD pair are responding cautiously to recent geopolitical events, regardless of whether they are positive or negative. Market participants still hope for a deal to be concluded, but remain skeptical about a quick "happy ending." As a result, the pair is trading within a fairly narrow price range, reflecting indecision among both buyers and sellers.

However, on Tuesday, the scales are tipping towards a bullish scenario. Despite American airstrikes and the aggressive statements from Iran, the de-escalation scenario remains the baseline and most likely outcome. U.S. Secretary of State Marco Rubio commented on recent events, stating that negotiations have stalled over disagreements over the wording of the deal, calling it "one proposal."

Such messages keep the euro afloat—especially against the dollar.

But it is not just "geopolitical optimism" that is supporting the euro; the European Central Bank also plays a significant role, as its representatives have recently been voicing hawkish rhetoric.

The main driver of the "hawkish wing" is Isabel Schnabel, who has recently signaled directly the need to raise interest rates at the June meeting. On Monday, she stated that the inflation shock has proven to be more extensive and persistent than previously thought, making the policy of ignoring this inflation spike "no longer a viable option." She also pointed out concerning leading signals, including the rise in consumer inflation expectations and companies' intentions to raise output prices. Furthermore, in her view, even if the conflict in the Middle East were to end "tomorrow," the ECB would still need to raise interest rates in June. In this context, she noted that damage to energy infrastructure and supply chains has already been done, and stabilizing the market will require "at least six months."

It should be noted that Schnabel's stance has hardened significantly since March, when she called for "not rushing to raise rates."

The head of the Bundesbank, Joachim Nagel, has also tightened his position, indicating the possibility of raising interest rates "if inflation remains above the target level." A similar sentiment has been expressed by Martin Kocher (head of the Austrian National Bank) and Martins Kazaks (head of the Latvian Central Bank).

ECB President Christine Lagarde typically seeks to maintain a balance in her rhetoric; however, her stance has recently shifted towards a more hawkish policy. In her speeches, she has increasingly noted that inflation risks are skewed to the upside—primarily due to energy prices and potential secondary effects related to wages and prices. She emphasizes that the risks of inflation being entrenched above the target level have become more significant than concerns about weak economic growth.

According to the ECB Watch Tool, the probability of a 25-basis-point increase in the deposit rate at the June meeting is about 80%. Specifically, 42 economists surveyed by Bloomberg estimate the likelihood of a monetary policy tightening next month at 75-80%. In the latest May poll from Reuters, there was a significant change in the structure of responses: 59 out of 70 surveyed economists (over 80%) forecast an increase in the deposit rate to 2.25% in June (compared to April's poll, which showed nearly an equal split—44 out of 85). Additionally, 35 of them expressed confidence that the ECB would raise rates at least twice this year.

Thus, despite the current indecision in the market, the ECB's hawkish stance remains a "trump card" for EUR/USD buyers that has not yet been fully priced in. If the U.S. and Iran indeed finalize a preliminary peace agreement soon, this fundamental factor will provide powerful additional support for the bulls in the pair.

Furthermore, even if geopolitical uncertainty persists, the firm position of the ECB will "soften the blow" for the euro and significantly limit the depth of potential price declines. All this suggests that long positions in the EUR/USD pair have strategic priority over short positions, especially given encouraging insider reports on the prospects of a deal between the U.S. and Iran.

However, as long as the pair fluctuates within a narrow price range, waiting for a resolution in the Middle Eastern narrative, market participants have to contend with sideways movement. Under the current circumstances, it makes sense to consider long positions on southern dips with an initial and, for now, only target of 1.1650 (the upper Bollinger Bands line on the four-hour chart).