Rabobank sees EUR/USD choppy near 1.14 as Iran war drives dollar

The Euro's 0.5% July gain masks a market where Rabobank sees choppy range trading near $1.14 as the Iran war keeps the US Dollar dominant.

The Euro traded near $1.1460 after gaining 0.5% in July, though Rabobank expects choppy conditions to persist as the Iran war keeps the US Dollar as the strongest G10 currency since the conflict began.

"The market is already long USDs and currently has little appetite to build these up further," Rabobank strategists said in a note dated July 16, pointing to the Dollar's failure to rally on renewed Fed rate hike speculation.

The US Dollar initially surged on safe-haven demand and short-covering after the Iran conflict erupted, then received a second boost as markets priced in a more hawkish Federal Reserve. Yet the greenback has failed to respond meaningfully to renewed speculation over a potential rate increase, despite sticky core inflation, tariff pressures and AI-related demand, the bank noted. Rabobank does not share the market's hawkish outlook for the Fed, limiting the scope for further Dollar upside.

On a one-to-three-month view, Rabobank expects choppy range trading around the $1.14 level, with similarly uneven conditions likely to persist into the autumn. The fading of optimism surrounding Germany's fiscal expansion, combined with higher energy costs and weaker Eurozone growth, has undermined Euro sentiment. Expectations for another European Central Bank rate increase are already reflected in current pricing, leaving limited room for investors to rebuild large bullish Euro positions.

The Iran war has reshaped currency markets in ways that extend beyond the Dollar's safe-haven bid. Higher energy costs from the conflict directly pressure the Eurozone, a net energy importer, while the US benefits from relative energy independence. The last time a major Middle Eastern conflict drove sustained Dollar strength — during the 1990-1991 Gulf War — the Dollar index gained roughly 10 percent over six months before reversing as hostilities ended. Any escalation or de-escalation of the current conflict could trigger significant moves in EUR/USD and other major FX pairs, with oil prices serving as the primary transmission mechanism.

This article is for informational purposes only and does not constitute investment advice.