The euro-dollar pair continues to trade in a narrow price range, responding impulsively to the current flow of information. However, neither buyers nor sellers of EUR/USD can turn the situation to their advantage. The dollar cannot find support amid conflicting macroeconomic signals (weak GDP growth against a backdrop of rising core PCE), while the euro is in "disgrace" amid heightened risk-averse sentiment amid ongoing tensions between the U.S. and Iran. As a result, the pair has found itself "in the grip of a sideways trend," with boundaries defined by the levels of 1.1760 and 1.1820.
On Monday, EUR/USD buyers attempted to break the upper boundary of the range in response to the rise in the IFO indices. Almost all components of the report came in the green zone, reflecting increasing optimism among German entrepreneurs.
Thus, the business climate indicator in Germany rose this month to 88.6, with a forecasted increase to 88.4, after staying at 87.6 for two months. On the one hand, the growth rates leave much to be desired; on the other hand, in February, this indicator reached its highest value since August last year.
The IFO current situation index jumped to 86.7 from 86.1. This is the highest index value since July 2024. Positive dynamics have been recorded for the second consecutive month.
Finally, the German business expectations index rose in February to 90.5 (in line with the forecast), updating its highest level since November last year.
Although not all sectors "kept pace" with the overall growth, noticeable structural improvements were recorded this month. In particular, the manufacturing sector showed a better assessment of the current situation. The services sector moved into nearly neutral territory (from negative values), indicating a recovery in services and logistics. The construction sector also significantly improved its indicators. Such mixed growth is a sign that the upturn is sustainable and not limited to a single sector.
The IFO indices align with the PMI indices published last week, which also found themselves in the "green zone," providing additional support to the European currency. Both reports paint a vivid picture of gradually strengthening business activity in Germany.
Let me remind you that the composite PMI index for Germany rose this month to 53.1, up from 52.1 in January. Both components—the manufacturing PMI and the services index—were above the 50-point mark, signaling an expansion of private sector activity.
Reacting to the latest report, EUR/USD buyers tested the 1.1820 resistance level (the middle line of the Bollinger Bands indicator on the daily chart) but were unable to hold above it. The reason for this is geopolitical tension.
According to The New York Times, Donald Trump is considering a targeted strike on Iran "soon." Moreover, this strike could be followed by a larger attack. According to insiders from the publication, if diplomacy or initial "targeted" strikes do not force Tehran to abandon its nuclear program, the U.S. will conduct a large-scale military campaign in the coming months with the aim of removing current Iranian leaders from power.
The consequences of such a step could be multi-layered—military, economic, and geopolitical. In particular, Iran may attempt to restrict shipping through the Strait of Hormuz, through which about 20% of global oil trade occurs. Even a partial disruption of traffic will cause a shock in the markets. There is also a likelihood that the conflict will expand to other Gulf countries. The transition from a "targeted operation" to a regional war with unpredictable dynamics is the main risk of the current situation.
Amid heightened risk aversion, the dollar is "staying afloat," in demand as a safe-haven asset. Although a prolonged conflict and increased budget expenditures in the U.S. could result in the opposite effect, for today, the greenback enjoys its status as a "safe haven."
However, hopes for diplomacy still remain. According to The New York Times, U.S. and Iranian negotiators are set to meet again in Geneva next Thursday (February 26). According to NYT insiders, this will be the last attempt to avoid military conflict. The outcome of this meeting remains an intrigue—perhaps even for its direct participants.
In anticipation of such an important—one could say fateful—event, EUR/USD traders are clearly being cautious. Both buyers and sellers. Therefore, it is not reasonable to expect sustained price movement (either up or down) under such conditions; it seems the pair will remain "in the grip of a sideways trend" until the situation with Iran is resolved. All other fundamental factors (for now) are secondary.
