EUR/USD: Is Germany's recovery already menaced?

The chain of cause and effect linking the geopolitical situation in the Middle East, crude oil price dynamics, and rising interest rates continued to exert downward pressure on the Euro/Dollar currency pair. It is worth noting that the Old Continent remains structurally far more dependent on crude oil imports than the United States, and that even a one-dollar increase in the price per barrel has different consequences there.

Thursday marked the conclusion of an ECB Governing Council meeting, which was overshadowed by the latest developments in the Middle East - specifically fears of a renewed flare-up and the conflict spreading to other strategic points for global oil logistics. Regarding the monetary policy decision itself, a decision to keep interest rates unchanged was announced, as expected.

On Friday, the US launched a new series of strikes in Iran, while Houthi allies opened another front in the conflict, claiming responsibility for attacks in the Red Sea that pushed the price of a barrel of oil above $100.

The situation in the Middle East is "out of control" and "on the brink of the unimaginable," UN Secretary-General Antonio Guterres warned during a Security Council meeting.

On the other side of the Arabian Peninsula, in the Red Sea, Iran-backed Houthis claimed responsibility on Thursday for attacks on two Saudi oil tankers. The rebels are threatening shipping through the Bab el-Mandeb Strait - which connects the Red Sea to the Gulf of Aden and has grown in importance since the blockage of the Strait of Hormuz.

Christine Lagarde stated that a prolonged war in the Middle East risked leading to "higher-than-expected inflation." She added that "some governors" at the Frankfurt-based monetary institution had even considered an interest rate hike. The yield on the French 10-year bond has quietly crossed back above the symbolic 4% mark - a first since 2008!

"Oil prices are currently hovering around $100 a barrel, while gas prices in Europe are seeing an even sharper rise. If an energy cost shock of this magnitude were to persist, the ECB could not ignore it and would raise rates again in September," observes Felix Feather, an economist at Aberdeen Investments. While the full impact of the energy shock on inflation has yet to be felt, the ECB intends to keep a close watch on the second-round effects that prolonged tensions could fuel.

Alexandre Perricard, President of Uzes Gestion, also offers his perspective: 'Given the many uncertainties surrounding the economic environment - such as supply chain disruptions, the risk of a supply shock, and the impact of US tariff policy - current inflationary pressures could persist into the first half of 2027. Unsurprisingly, and despite the resilience of economic activity in the Eurozone during the second quarter of 2026, the ECB is forecasting modest economic growth for the second half of 2026.'

The Fed will conclude its monetary policy committee meeting next week.

On the data front, currency traders have just received the 'flash' figures (initial estimates) for July regarding Eurozone activity indicators for services (51.7) and manufacturing (52). These figures came in above expectations.

'However, the sustainability of the recovery in the coming months depends largely on the situation in the Middle East,' notes Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. 'The recent rise in oil prices and renewed concerns regarding maritime transport pose a downside risk to the region's economy.'" "Indeed, mounting inflationary pressures and the resurgence of supply constraints - particularly regarding energy - threaten to derail this nascent recovery."

Right now, the EUR/USD is trading at  $1.13706.

KEY TECHNICAL FACTORS
The pullback (technical rejection) we identified in previous analyses - occurring at a zone where resistance levels converged (a horizontal level at $1.1610 and the 20-day moving average) - was followed by a surge in selling pressure. The target of $1.1203 remains in place. The spot rate is currently breaking below its annual lows ($1.1408).

A break below the $1.1202 level - accompanied by significant volatility - would confirm a lower bearish target of $1.1012, prior to a sharp, corrective upward rebound.

MEDIUM-TERM OUTLOOK
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is bearish.