EUR/USD Weekly Outlook – June 16, 2025: War Erupts, Dollar Weakens as Euro Eyes 1.15 Breakout

• U.S. inflation cools further in May, weakening the dollar as markets price in earlier-than-expected Fed rate cuts. Meanwhile, the U.S. and China appear to have reached a preliminary tariff agreement. The outbreak of war between Iran and Israel, however, signals that this time the conflict may not be limited to symbolic strikes.
• In Europe, markets expect the ECB to pause further rate cuts, especially given the risk of a fresh spike in energy prices triggered by the Middle East conflict.
• The EUR/USD is once again testing the 1.15 resistance level after the inflation data. A decisive breakout could open the door to further dollar weakness.

U.S. Inflation Cools, but War and Fragile Trade Deal Cloud the Outlook

As the U.S. and China reached a preliminary deal on tariffs and the exchange of critical resources like rare earths during talks in London, May inflation numbers in the U.S. came in softer than expected. The agreement between these two economic giants—locked in a tariff standoff since April—hasn’t done much to lift market sentiment. Traders seem unconvinced, sensing that beneath the grand statements from Trump and Bessent lies a fragile accord. The coming days will be key in determining whether this political direction is viable and the deal sustainable.

U.S. inflation rose 2.4% year over year in May, with a monthly increase of just 0.1%—below expectations. The core index followed a similar path, rising 2.8% and continuing its gradual retreat. The message to the Fed is clear: with inflation pressures subdued, and if the China deal holds, Trump will likely intensify pressure on Powell over rates. Holding rates steady will become increasingly difficult for the Fed absent stronger inflationary signals. September could mark the first real opportunity for a move, but a major risk is already looming. Israel’s strikes on Iranian military and nuclear sites have ignited fears of a surge in oil prices, with obvious downstream effects on energy costs. Iran’s retaliation suggests this won’t be a repeat of previous token strikes, and the risk of the conflict spreading geographically is real.

This is one of the reasons why the ECB appears inclined toward caution on any further rate reductions after its recent cut to 2%. Markets have taken note, with the euro benefiting from the narrowing rate differential with the dollar.

Technical Analysis: EUR/USD Confirms Bullish Breakout but Faces Oscillator Warning Signs

Despite our short-term view expressed last week, we can’t ignore the pattern seen in EUR/USD over recent weeks. A breakout past resistance, a textbook pullback to support, and a renewed push higher now targeting the April highs. The bullish breakout is confirmed, with a move beyond the 1.15 area opening up some very intriguing prospects. To be fair, the 1.17 zone holds some initial resistance tied to the 2020–2021 period, but that would likely be just a stepping stone on the way to 1.20—or higher.

What still leaves us cautious about the euro’s ability to sustain a decisive acceleration is the behavior of the price oscillator. This indicator, which measures the spread between the spot price and the 200-day moving average, is approaching the 5% zone—a level that has historically coincided with primary tops for the euro lasting several months. A break of this “rule” would have markedly negative implications for the dollar’s outlook, exposing its vulnerabilities fully.