The retreat of oil from four-year highs, the acceleration of European inflation from 2.6% to 3% year-on-year in April, and alarming forecasts from the Bank of England allowed the "bulls" in EUR/USD to launch a counterattack. After the FOMC meeting results were announced, their positions looked hopeless; however, the market always changes at a kaleidoscopic pace.

The primary factor remains oil. The rise of Brent above $120 per barrel, which has not happened since 2022, combined with Jerome Powell's intention to stay on the FOMC after his term as the central bank's head, led to the fastest rally in U.S. Treasury yields in four years. At the same time, the chances of a federal funds rate hike in 2026 increased, which supported the U.S. dollar.

Dynamics of Treasury Yields and Fed Rate Projections

However, already during the Asian Forex session, oil began to decline, which reduced Treasury yields and allowed the "bulls" in EUR/USD to lift their heads.

And there's more. The BoE, while doing what the markets expected—keeping the repo rate at 3.75%—surprised investors with revised forecasts. Three scenarios were presented. If Brent trades near $130 per barrel, a monetary policy tightening of 50-150 basis points will be necessary.

Markets expect that the European Central Bank will follow a similar path. Especially since consumer prices in the Eurozone have soared to 3%, the highest level since September 2023. Nevertheless, economic growth in the first quarter did not meet expectations. The pronounced stagflation backdrop makes it difficult for the ECB to decide on the rate. Bloomberg experts are anticipating one rate hike in June, while the futures market predicts two monetary restriction actions.

Dynamics of GDP in the Eurozone and Individual Countries

In my opinion, the drop in Brent seems unusual against the backdrop of rumors about the U.S. resuming bombings of Iran to push Tehran towards negotiations. The Strait of Hormuz remains closed and, according to Polymarket forecasts, is unlikely to open before early July. In such conditions, the oil market deficit will grow, which, in theory, should push prices even higher. Do investors really believe that a new wave of combat actions will make the Islamic Republic more amenable and bring an end to the conflict in the Middle East?

This theory needs to be tested. I would just note that inflation is transmitted through oil prices with a time lag. If inflation remains high, it will pave the way for the Fed to impose monetary restrictions.

Technically, on the daily chart, EUR/USD rebounded from two of the three moving averages. A breakout of the third moving average, which would push the euro to $1.173, would be a "bullish" sign for the euro. However, a bounce from this resistance or a return below the fair value at 1.169 would provide grounds for forming short positions in the main currency pair.