Everything has its time. According to Bank of America, EUR/USD will begin to rise sharply in the second quarter. It is then that the European economy will finally feel the full force of Friedrich Merz's fiscal incentives and the increase in EU defense spending. At the same time, the United States will reinstate tariffs, worsening its budget situation and slowing GDP growth. The economic growth gap will narrow, opening the way for the main currency pair to move higher.

For now, it simply isn't the time for the euro. Investors need to be able to wait. Indeed, not only does the narrowing of the gap in GDP growth rates work in favor of EUR/USD. Until June, and possibly until July, the Fed is unlikely to lower the federal funds rate. The difference between it and the ECB deposit rate is 175 basis points. Such a spread also manifests itself in the bond markets. Yields on American securities are clearly higher than those on European securities.

Dynamics of Yield Curves for US and German Bonds

When both central banks have paused or completed their monetary expansion cycles and the interest rate differential is wide, a paradise for carry-trade emerges. Players on the difference use the euro as a funding currency and the US dollar as a yielding asset, making money out of thin air. At the same time, increased demand for the greenback leads to a decline in EUR/USD quotes.

The dynamics of the main currency pair are determined not only by carry-trade but also by hedging flows. According to Credit Agricole, the strengthening of the US dollar in response to the rise in US stock indices is due to a reduction in foreign investors' hedging of currency risks, as they invest in dollar-denominated assets. When they buy stocks, they simultaneously sell greenbacks and vice versa. The increase in the inverse correlation between the USD index and the S&P 500 does not mean that the US dollar has regained its status as a main safe-haven asset. The root of the matter lies in hedging flows.

However, events in the Middle East may help the greenback regain its former role. The deadline for Trump's ultimatum to Iran is approaching on March 1-5, and armed conflict in the Middle East is getting closer. What should be bought in this case? Where to hide money?

The euro is unlikely to be popular. The Eurozone is a region that is a net exporter of oil. A rise in Brent above $90 per barrel is unlikely to please the currency bloc and its monetary unit. The situation is different for the United States. They are a net exporter of energy products. Therefore, hostilities in the Middle East are more likely to strengthen the US dollar rather than weaken it.

Technically, on the daily chart, EUR/USD is showing a rebound from dynamic resistance, as indicated by a combination of moving averages. At the same time, if the main currency pair breaks below the lower boundary of the fair value range of 1.1785–1.1940, it will serve as a basis for selling. It makes sense to transition to buying euros against the US dollar above 1.1835.