Commerzbank’s Antje Praefcke notes that recent headlines around a possible diplomatic solution in the Middle East war have weakened the Dollar and supported EUR/USD. She argues FX may stay relatively muted until there is clearer evidence on the conflict path and a reliable easing of tensions. At that point, she expects the Dollar to come under renewed pressure and EUR/USD to trend higher.

Dollar seen softening on de-escalation hopes

"At least yesterday, the news flow seemed to give the market renewed hope that a diplomatic solution might still be possible in the war in the Middle East, which is why the dollar weakened during the day."

"The foreign exchange markets could continue to show relatively muted reactions as long as there is no clearer indication of how the conflict will unfold."

"Only when a reliable easing of tensions becomes apparent does it make sense to assess much more precisely the potential consequences of the oil price shock for inflation, the possible reactions of central banks, and, accordingly, the interest rate differentials, which in turn could give exchange rates more momentum of their own."

"We have often written that we expect the dollar to come under pressure again at that point."

"Until then, EUR/USD is likely to trend upward on hopes of a resolution."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)