The darkness deepens before the dawn. For now, the US dollar is enjoying, in traders' words, "the best of both worlds" — combining safe-haven status with outpacing economic growth — while EUR/USD continues to search for any floor to hold onto.

Over the weekend, the US and Iran again traded strikes. US command reported a new round of attacks on Iranian air defense systems, coastal radars and missile capabilities — dozens of targets hit — and Tehran replied with strikes on bases in Kuwait, Bahrain, and Jordan. The IRGC said it intercepted two vessels it considered to be illegally navigating the Strait of Hormuz. The parties still disagree even on whether the strait is open to shipping, which does little to reassure investors hoping for a quick de-escalation.

US recession probability dynamics

Against this backdrop, the US economy continues to surprise. Forecasters have raised their GDP growth estimate for the US this year to 2.1% from April's 2.0%, and the probability of a recession over the next 12 months has fallen to 25% from 33% — the lowest since early 2025.

There is little to boast about in the eurozone: a Bloomberg survey of 56 economists conducted July 3–8 showed 2026 GDP growth forecasts cut from 0.7% to 0.5%, below even the ECB's baseline of 0.8%. Analysts point to the renewed fighting in the Middle East as the main reason for the downgrade, and the divergence in the two economies' momentum is an additional trump card for the US dollar.

European economic outlook

But it's not all one-sided. MUFG sees scope for a euro rally in the coming weeks. Yes, the single currency is the weakest G10 performer in July so far, but the two-year yield spread has begun to turn in its favor — yields on European debt are rising faster than in the US. The bank believes the ECB minutes at least cemented market expectations for another rate hike in the region. Meanwhile, next week's US CPI print and Fed Chair Kevin Warsh's testimony to Congress will be decisive for short?term yield dynamics — and thus for EUR/USD.

MUFG explicitly warns of downside risks to US Treasury yields, which could return upward momentum to the euro. For now, the dollar enjoys a dual premium — economic strength and geopolitical fear — but such a combination rarely lasts forever. Markets have repeatedly shown that excessive confidence in one currency can reverse sharply the moment one of its support pillars cracks. Sooner or later, one of those supports will fracture. The only question is which one will break first — faith in US exceptionalism or the market's patience with bond yields?

Technically, on the daily chart, a gap fill would be a positive sign for the bulls. A sustained hold above support at 1.141, followed by a push to a local high around 1.1445, would be reasons to buy.