EUR/USD ticked up on Wednesday but stayed locked in its downtrend from the May 11 high, trading below both the 10- and 21-day moving averages—technical signals that are bearish in their own right. More troubling for investors, though, is that the pair isn't capitalizing on a notable rise in euro zone interest rates, suggesting underlying weakness.

The catalyst for those higher euro zone rates has been the sharp rally in oil prices following the escalation of the U.S.-Iran conflict, which raises the risk of hotter euro zone inflation. This has pushed euro zone rates markets to price in a more hawkish ECB stance: the German 2-year government yield

broke above a bull pennant pattern that had been forming since March, while June 2027 Euribor futures dropped below the base of a bear pennant. Both developments point to markets anticipating the ECB may need to raise rates.

Yet despite these upward moves in euro zone rates, EUR/USD hasn't been able to rally—it's actually trading slightly lower than when the U.S. resumed bombing Iran on July 8. This suggests investors are focused more on the U.S. side of the equation, with rising U.S. rates reflecting growing bets that the Fed could hike rates later this year.

Given this dynamic, EUR/USD is likely to struggle to sustain any meaningful rally. A genuine turnaround would probably require a downward shift in U.S. inflation expectations, which could prompt markets to price in a less-hawkish Fed.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)