If an asset is not heading where it is expected to go, there's a good chance it will move in the opposite direction. The divergence in economic growth and shifting investor views on the fate of Federal Reserve and European Central Bank rates should have drowned EUR/USD. However, the major currency pair clung to the 1.16 level, stubbornly refusing to fall. As a result, thanks to statements from the White House on peace in the Middle East, the euro rose, which could mark the start of a broad rally.

The dollar did not gain ground amid improved global risk appetite, even as the confrontation between the U.S. and Iran persisted. Major reasons cited include strong corporate earnings reports from American companies and hopes for de-escalation of the conflict in the Middle East. While previous speeches by Donald Trump about the proximity of a deal with Tehran proved untrue, there's a saying: where there's smoke, there's fire.

Position Dynamics of Hedge Funds and Asset Managers on the U.S. Dollar

When the U.S. president began discussing the final stages of a deal with Iran, and Secretary of State Marco Rubio expressed confidence it would be concluded, investor sentiment shifted significantly. Moreover, rumors about an agreement this time were coming not only from the White House but also from Tehran and intermediaries. As a result, hedge funds and asset managers who had previously bought U.S. dollars are now preparing to sell.

The primary reason may be a change in futures market expectations for the federal funds rate. Currently, derivatives suggest a 55% probability of a hike in 2026. However, if the White House is correct and the inflation surge is temporary, the Fed will not need to tighten monetary policy. On the contrary, the time may come when easing will be necessary. This is also the view of BlackRock, one of the largest asset managers in the world, which claims that if there must be a choice between restriction and expansion, it would prefer rate cuts.

A strong argument could be the appointment of Kevin Warsh as the Fed chair. Trump is hopeful that this individual will convince the FOMC of the need for monetary easing. His swearing-in taking place at the White House was a first since Alan Greenspan's time.

Trump has spoken about the Fed's independence, but the U.S. president was more focused on the temporary nature of the inflation slowdown. This process could serve as a basis for lowering the federal funds rate in the future. However, the central bank must first see a slowdown in consumer prices.

Technically, on the daily chart, EUR/USD is returning to the fair value range of 1.1630-1.1785. If the bulls hold support at 1.1630, the risk of a continued rally will increase. In this case, emphasis should be placed on opening long positions in euros against the U.S. dollar.