The euro gapped lower immediately on Monday, as traders reacted to the lack of a peace agreement between Iran and the US. However, we have since seen a strong bounce.
EUR/USD
The euro initially gapped lower during the open on Monday as there had been a lot of concerns out there due to the fact that the United States and Iran did not come to a conclusive agreement over the weekend. That being said, we have seen things turn around as traders are starting to price in the idea of perhaps the war coming to an end sooner rather than later as the ceasefire is still very much in effect.
The 1.17 level is basically where we find ourselves right now and this is an area that I think a lot of people will be watching very closely. Short-term pullbacks do make a lot of sense here with the 50-day EMA offering support. That being said, eventually I believe the interest rate differential comes back into play here but we may have to reach the 1.18 level before the euro is just a touch too expensive.
Interest Rate Differentials and European Outlook
The US dollar of course will remain the dominant driver of where we go and for that I typically will watch the 10-year yield. You can play the 10-year yield interest rate differential between the United States and Germany and although it's tighter than it used to be, it is still not massive in its influence from a day-to-day basis. It's more or less a longer-term outlook.
Germany is likely to continue to suffer at the hands of stagflation this summer and I think eventually that weighs on the euro. I am still looking to short this pair, but I fully acknowledge we may have one more complete handle to go to the upside before the perfect setup.