The Euro to Dollar (EUR/USD) exchange rate is holding close to 1.1415, despite renewed geopolitical tensions in the Middle East that would normally be expected to support the US Dollar.
UniCredit believes the Dollar’s muted response reflects a combination of higher global bond yields, resilient equity markets and fading expectations of an imminent Federal Reserve rate increase.
The bank identifies rising long-term yields outside the United States as the most important factor supporting the Euro.
According to UniCredit, higher German Bund and Japanese government bond yields are providing a “parachute” for other major currencies, reducing the Dollar’s traditional safe-haven advantage during periods of geopolitical stress.
The bank also notes that minutes from the Federal Reserve’s latest meeting remained cautious on inflation but stopped short of signalling an imminent interest-rate hike, while global equity markets have remained remarkably resilient.
UniCredit adds that investors have become increasingly accustomed to shifts in President Trump’s rhetoric, making markets less likely to react aggressively to geopolitical headlines alone.
Even so, the bank does not expect a sustained Dollar sell-off until diplomatic progress resumes.
According to UniCredit, “a rapid move back above 1.15 in EUR-USD… appears unlikely” while negotiations between the US and Iran remain stalled. At the same time, the risk of EUR/USD slipping back towards the year’s low near 1.1325 “has therefore not disappeared” if tensions escalate further.
