The final trading day of last week ended on an uncertain note. Reacting to Middle East developments, the EUR/USD pair sharply declined on Friday, retreating from the multi-year price high of 1.1632. However, by the end of the U.S. session, the bearish impulse faded: buyers gradually but steadily began reclaiming their positions. One could say the market paused mid-sentence—traders didn't have time to fully digest the implications of the outbreak of war between Israel and Iran. The U.S. dollar attracted heightened demand as an initial response, but this interest quickly subsided. The U.S. Dollar Index ended Friday's session near the 98.00 level despite hitting a local high of 98.58 earlier in the day. EUR/USD mirrored this movement, closing the week at 1.1551.
Undoubtedly, the Middle East conflict will continue to influence the markets overall, and EUR/USD specifically. For example, it's safe to say that geopolitical de-escalation would benefit EUR/USD buyers through increased interest in risk assets. Conversely, if the conflict escalates and expands geographically (e.g. if Iran blocks the Strait of Hormuz and/or attacks U.S. assets), EUR/USD traders will likely remain cautious, keeping the pair around the 1.14–1.15 range.
As of today, Iran and Israel continue to exchange missile strikes. However, some signs of a potential resolution are emerging. For instance, Iranian Foreign Minister Abbas Araghchi stated that Iran is ready to sign an agreement guaranteeing the absence of nuclear weapons. Additionally, Tehran announced that if Israeli attacks cease, Iran will also halt its strikes on Israel.
On one hand, this sounds de-escalatory. But on the other hand, there's a catch: even before Israel's strikes, Tehran had claimed it was not seeking nuclear weapons but remained unwilling to give up uranium enrichment. Iran insists on maintaining a full nuclear fuel production cycle for peaceful energy purposes. Araghchi even noted that any nuclear agreement "should not deprive Iran of its nuclear rights."
Meanwhile, Iran's opponents—especially Israel—remain firm in their belief that Iran is covertly developing nuclear weapons.
Therefore, the latest statements by the Iranian foreign minister are unlikely to bring about immediate de-escalation. According to Israel's Ministry of Defense, IDF jets will continue targeting Iranian sites to "erode Iran's nuclear capabilities and weapons systems."
Still, diplomacy cannot be completely ruled out—especially since Iran's tone has shifted somewhat. After Israel's strikes began, Tehran had repeatedly declared that nuclear deal talks with the U.S. were no longer relevant. Yet the comments suggest a shift in stance. Additionally, Donald Trump is pushing for a deal between Israel and Iran while simultaneously threatening to unleash "full force" if Iran strikes U.S. assets.
In other words, the outcome of the Middle East conflict remains uncertain, and any plot twist could trigger sharp volatility in EUR/USD.
All other fundamental factors will take a back seat—except perhaps the June FOMC meeting, the results of which will be released on Wednesday.
Most analysts believe the Federal Reserve will leave all monetary policy parameters unchanged. According to the CME FedWatch Tool, the probability of this scenario is 99.6%. Therefore, all trader attention will focus on the accompanying statement and Fed Chair Jerome Powell's remarks.
Traders will be especially interested in the Fed's assessment of recent key macroeconomic indicators. For example, the U.S. labor market showed a relatively decent, though not stellar, result: unemployment remained at 4.2%, and nonfarm employment rose by just 139K (vs. 147K in April). Other data were more ambiguous: manufacturing and services ISM indices slipped into contraction territory. Inflation data was also mixed: headline CPI and PPI accelerated, while core CPI was flat, and core PPI slowed to 3.0%. Meanwhile, inflation expectations calculated by the University of Michigan remain elevated at 5.1%, well above the Fed's 2% target.
Without a doubt, the June Fed meeting will spark intense volatility in EUR/USD—especially if Powell raises concerns about stagflation, given the acceleration in headline CPI/PPI and contraction in ISM indices. All while the announced trade deal with China maintains 55% tariffs on Chinese goods. However, if the Fed remains optimistic and highlights stable core inflation and slower core PPI, the dollar might find some support.
When discussing the key macroeconomic reports for the upcoming week, a few important ones stand out.
We will receive data on the volume of retail sales in the United States on Tuesday, June 17. Preliminary forecasts suggest that total retail sales will decrease by 0.6% in May, following a modest increase of 0.1% in April. Excluding auto sales, retail sales are expected to rise by 0.2% (April recorded a 0.1% increase).
Additionally, on Tuesday, data on U.S. industrial production will be released. This report is anticipated to show no growth in May, maintaining the same level as in April. This information could exert pressure on the U.S. dollar, particularly in light of the weak ISM manufacturing index, which fell into the contraction zone in May.
The ZEW indices are an important release scheduled for Tuesday. The German business sentiment index is anticipated to rise to 34.8 this month, following an increase to 25.2 in the previous month. Meanwhile, the pan-European economic sentiment index is expected to reach 23.5 after rising to 11.6 in May.
In addition to the results from the June Fed meeting, data on building permits will be released on Wednesday. In April, this indicator showed a decline of 4.7%, and it is also expected to reflect negative dynamics in May, with a forecast of -5.1%.
On Friday, we should focus on the manufacturing activity index from the Federal Reserve Bank of Philadelphia. Although this is a minor release, it could provide additional insight into the overall economic situation, particularly if U.S. industrial production declines rather than remaining at the predicted zero level. Current expectations are for the index to show a reading of -1.2 points this month, following a decline to -4.0 in May.
Consequently, the conflict in the Middle East and the upcoming Fed meeting in June are the key topics for EUR/USD traders in the coming week. Other fundamental factors will also play a secondary but still significant role.
On Friday, EUR/USD attempted to break intermediate support at 1.1490 (Tenkan-sen on D1) but failed—closing the session at 1.1551, right at the upper Bollinger Band on the daily chart and above all Ichimoku lines. This supports a bullish bias. If bulls hold above the 1.15 level on Monday, long positions targeting 1.1600 (upper Bollinger Band on H4) and 1.1650 (upper Bollinger Band on W1) may be justified.
