The euro-dollar pair finished Friday's trading at 1.1372. For the first time since early July, traders closed the week outside the 14's figure. This is a significant moment that reflects the overall strengthening of the US dollar across the market. Another round of escalation in the Middle East, a sharp rise in oil prices, and increased inflation expectations have played in favor of the greenback. The US Dollar Index has consolidated in the 101 range, whereas EUR/USD sellers managed to exit the range of 1.1410 – 1.1470. Although they could not break the support level at 1.1370 (the lower line of the Bollinger Bands indicator on the D1 timeframe), bearish sentiment clearly dominates the pair.

Notably, EUR/USD traders ignored the hawkish signals from the European Central Bank, as well as the ZEW and PMI indexes, which significantly exceeded expectations. The euro failed to seize the initiative, even though it seemed that the stars were aligned in its favor this week.

For instance, the German Economic Expectations Index rose to 26.3 points in July (from 10.5 in June), significantly exceeding the consensus forecast of 18.0. The current situation assessment also improved (from -81.0 to -77.6), although it remained in negative territory. The broader European ZEW index also showed an upward trend, climbing to 23.4 points — the highest level in the last five months. This indicates an increase in optimism regarding the prospects for the eurozone economy. Importantly, these are July data, meaning such confident results were obtained amid escalating tensions in the Middle East and rapidly rising oil prices.

Preliminary PMI indexes for July also came out in the positive zone. For example, the composite index for the eurozone rose to a five-month high (51.9 points), while production volumes in the manufacturing sector showed the fastest expansion rate since March 2022. Additionally, the German economy emerged from contraction for the first time in four months: the composite PMI for Germany reached 51.2 points, thanks to a strong surge in the industrial sector (52.2). A strong point in the report was the resurgence of new order growth (the fastest pace since April 2023) and a reduction in logistical disruptions, allowing businesses to begin replenishing raw material stocks for the first time in 3.5 years. All of this indicates that the currency bloc's economy demonstrates resilience even amid geopolitical tensions and high energy prices.

The outcomes of the ECB's July meeting also favored the euro. The central bank emphasized that the inflationary effects of the recent rise in energy prices and the risks associated with the Middle Eastern conflict "have not fully manifested." According to Christine Lagarde, the central bank remains cautious about the "second-round effects" — that is, the risk that the spike in commodity prices could lead to sustained increases in wages and core consumer prices.

Additionally, the central bank acknowledged that rising energy prices due to the Middle Eastern escalation could accelerate inflation again, spreading over time to a wide range of goods and services. In this context, the Governing Council refrained from hinting at the end of the tightening cycle. Furthermore, ECB members maintained intrigue regarding the prospects of a September hike—neither confirming nor denying the corresponding market expectations.

Although buyers of EUR/USD clearly anticipated more (primarily direct hints at a fall rate increase), the results of the July meeting can generally be characterized as a "hawkish pause."

However, strong ZEW indexes, optimistic PMI data, and relatively firm signals from the ECB could not help the euro seize the initiative from the dollar. This market reaction can be attributed to a combination of three closely related factors: the escalation of the conflict in the Middle East, the rapid rise in oil prices, and the strengthening of hawkish expectations regarding further actions by the Fed.

The Middle Eastern conflict became the primary reason for the strengthening of the greenback. After the US and Iran exchanged strikes again and Donald Trump suggested the possibility of renewing large-scale military operations, anti-risk sentiment increased in the market, allowing the safe-haven dollar to strengthen its position. Amid concerns about potential supply disruptions, Brent crude oil climbed above $100 per barrel for the first time in a long while. This is especially negative for the eurozone, as another rise in energy costs increases the risk of stagflation (weak economic growth or recession combined with renewed inflation). This is why strong ZEW and PMI data did not support the euro.

The rise in oil prices also influenced inflation expectations in the US. While high oil prices primarily heighten the risk of stagflation in the eurozone, in the US they increase the likelihood of the central bank maintaining a tight policy (with an open option for tightening already in September). According to data from the CME FedWatch tool, the probability of a rate hike at the September meeting has risen to 70%. As a result, the differential in rate expectations has again begun to work in favor of the dollar.

Thus, the prevailing fundamental backdrop for the EUR/USD pair contributed to the price decline. However, the market reaction to recent events has been relatively restrained. Despite the downward momentum, sellers were unable to establish themselves below the support level of 1.1370 (the lower line of the Bollinger Bands indicator on the D1 timeframe). However, they did test this price barrier (the weekly low was recorded at 1.1365).

It seems that market participants still "believe" in a scenario of limited escalation, viewing the current surge in tensions more as a pressure tactic within the (upcoming) negotiation process rather than the beginning of a new full-scale war. This explains the cautious attitude toward the dollar: the US currency enjoys increased demand as a safe-haven asset; however, it is premature to speak of the formation of a sustainable trend.

Therefore, it is advisable to consider short positions on the pair only when EUR/USD sellers establish themselves below the support level of 1.1370, thereby opening the way to the next price barrier at 1.1300 (the lower line of the Bollinger Bands on the weekly chart). Otherwise, the pair may return to the range of 1.1410 – 1.1470, where it traded for several previous weeks.