Those who see they are losing the fight exit with minimal losses. This is exactly what Wall Street banks have done, capitulating on their bets for a strengthening euro. JPMorgan Chase, Morgan Stanley, and Bank of New York Mellon believe that the euro could lose over 3% and reach the mark of 1.10.

Earlier in 2026, policymakers in the Eurozone complained about the excessive strength of the euro, which broke above $1.20 for the first time in five years. However, the conflict in the Middle East changed the rules of the game. The surge in oil prices triggered a flight to the dollar as a safe-haven asset, and EUR/USD updated its annual low in June.

It's not just about geopolitics. Prior to the first FOMC meeting under Kevin Warsh, traders worried that the new chair would bend to pressure from Donald Trump and talk about lowering rates. However, Warsh made it clear that the central bank is not willing to tolerate high inflation. The futures market immediately increased bets on a Federal Reserve rate hike.

The European Central Bank, on the other hand, has chosen a cautious approach. Christine Lagarde stated that after a single rate hike, a more decisive response to the conflict in the Middle East is unnecessary and that inflation will return to target in the medium term. The divergence in central banks' rhetoric works against the euro.

Risk Dynamics of Euro Reversal

Bank of New York Mellon is confident that the ECB made a mistake by raising rates. This decision only weakened the arguments in favor of the euro by negatively impacting growth. The bank allows a decline in EUR/USD below 1.10 but is not aggressively selling it.

Bloomberg strategists take it a step further. A fair value model based on interest rate differentials and volatility as an indicator of risk appetite suggests EUR/USD closer to 1.11. Bank of America has cut its forecast from 1.20 to 1.15. Societe Generale succinctly stated: "the strong euro is largely over."

However, not everyone is burying the currency. According to MUFG, there are two scenarios. If the Fed does not raise rates, EUR/USD will return to the 1.14–1.18 range. If the Fed implements several acts of monetary tightening, the pair risks plunging significantly below 1.10.

Meanwhile, the US and Iran have agreed to halt mutual strikes until negotiations over the Strait of Hormuz resume. According to the White House, talks with Tehran regarding the deal will continue, and ships will be able to operate freely. De-escalation should reduce demand for the dollar as a safe-haven, but the market has already shifted its focus to the interest-rate differential between the Fed and the ECB.

The upcoming ECB forum in Sintra will clarify the fate of EUR/USD. Whether the euro falls to $1.10 or finds the strength to rise depends on the divergence in monetary policy paths on either side of the Atlantic.

Technically, on the daily chart, EUR/USD is attempting to recover as bulls try to bring the quotes back into the fair value range of 1.1425-1.1665. A breakout of its lower boundary will provide grounds to increase open long positions from 1.1375.