Rumors of de-escalation in the Middle East are warming euro bulls and prompting attacks. Donald Trump's remarks about the war ending soon and the US and Iran resuming talks within the next two days catalyzed the euro's return to levels seen before the conflict. Given elevated oil prices, however, the rally in the major pair looks surprising.

Credit Agricole notes that the move is built on the TACO strategy — "Trump Always Chickens Out." Investors got a lot of practice in 2025 when the White House imposed the largest tariffs since the 1930s. Today, rising global risk appetite is weighing on the dollar's safe-haven role and reducing USD reversal risk priced into markets. Still, Credit Agricole is sceptical that the uptrend in EUR/USD will be sustained.

Dynamics of USD reversal risk

The US and Iran's positions remain far apart. A positive market reaction could encourage Washington to step up pressure on Tehran, which would backfire. The US economy is in better shape than Europe's.

All that makes sense — so why is EUR/USD still rising? Part of the story is the US equity rally, but that is clearly insufficient. Another possible driver is monetary policy divergence: while the market expects nothing from the Fed in 2026, the ECB is priced for two to three tightening moves. However, those hikes will hardly materialize. Most likely, the futures market will revert its bets on fed funds cuts.

USD index performance

What if the dollar's fall is simply the correction of a long-running overvaluation? Harvard researchers argue the greenback is roughly 20% overvalued. Historically, when such overvaluation occurred, the currency declined over the subsequent five to six years.

This view seems to appeal to hedge funds. Morgan Stanley's research shows they actively reduced dollar exposure in the week to April 10. Goldman Sachs finds that, rather than buying the dollar on dips, this group has been selling it amid rallies.

Markets have decided the Middle East will be OK and prefer the optimism trade — the euro — over the pessimists' dollar. As a result, emotion is dominating fundamentals and EUR/USD is rising. How long will this last? Societe Generale says another round of de-escalation headlines could push the pair to 1.20.

Technically, the daily chart shows that EUR/USD is currently pulling back after a seven-day uninterrupted rally. That correction looks normal, and bulls remain in good shape. Key support levels lie near pivot points at 1.1760 and 1.1725. A bounce from those levels would provide an opportunity to add previously established long euro positions.