Markets have become so convinced of the de-escalation of the conflict in the Middle East that they are turning a blind eye to the periodic violations of the ceasefire. Iran is striking the United Arab Emirates, while Israel is targeting Lebanon, eliminating one of Hezbollah's commanders. Yet investors view the negotiations between Washington and Tehran as the baseline scenario, resulting in peace in the region. US stock indexes are rewriting historical highs, oil prices are falling, and EUR/USD is rising.

Geopolitical conflicts are typically temporary. Thus, the logic for investors is simple: what grew at the beginning of the confrontation should fall at its conclusion. As a result, oil, which was previously a strong performer, has entered a wave of sell-offs, while gold, seen as an underperformer, appears undervalued and is in higher demand. The once-strong US dollar fell out of favor in May. Conversely, the euro is attracting new followers.

Dynamics of US Inflation Expectations

EUR/USD is moving confidently higher, aided by the drop in oil prices, which has reduced US inflation expectations. Investors are beginning to believe that high prices in the United States are a temporary phenomenon. If the labor market shows signs of weakness in April, the Federal Reserve could easily return to the idea of resuming its monetary expansion cycle, especially under the leadership of new Chairman Kevin Warsh.

This situation is disheartening for dollar supporters and pleasing for its opponents. It is no surprise that EUR/USD is moving upward.

However, this time, the geopolitical conflict has dragged on. Additionally, it will take time to restore the damaged infrastructure in the Persian Gulf countries. High oil prices may persist, significantly impacting global demand and the world economy. The main victims appear to be net importers of energy products, such as the Eurozone and Japan. Nevertheless, both the euro and the yen are strengthening. Is it a paradox?

No! It's about momentum. The market is on a rollercoaster ride, believing that everything is returning to normal. On the side of EUR/USD, market expectations of two acts of monetary tightening from the ECB, with a possibility of a third, play a role. If high inflation is temporary, it is clear that the European Central Bank will not aggressively tighten monetary policy. If they do anything at all. A retreat in market expectations could be an unpleasant surprise for the euro.

For now, as euphoria reigns in the markets, the main currency pair feels like a fish in water. We will see how long this celebration on Bull Street lasts.

Technically, on the daily chart, EUR/USD is testing the upper boundary of the fair value range at 1.1675-1.1775. If buyers succeed, there will be the opportunity to form long positions. Conversely, a rebound from this important resistance level would be a reason to sell euros.