On April 30, the European Central Bank will hold its next meeting. A month ago, the market was almost certain the rate would be raised by 25 basis points, allowing the euro to recover a significant portion of its decline in early April amid the threat of an energy crisis. However, the expectation vector has shifted, and if the ECB dares to raise rates, it would come as a big surprise.

Recent economic data does not appear convincing enough for the ECB to ignore it. The April PMIs have deteriorated compared to March, particularly in the services sector. Consumer confidence has declined, and the explosive inflation many feared has not yet materialized.

The situation seems frozen, as the military confrontation between the US and Iran is unfolding in a "neither peace nor war" scenario. The stated willingness to negotiate from both sides is hampered by the desire to uphold their objectives, and there is currently no resolution in sight. For Europe, this situation poses significant threats, not only in terms of inevitable inflation but also due to its enormous dependence on external energy supplies, especially since Europe has voluntarily given up reliable, cheap supplies from Russia, effectively trapping itself.

As hopes for a peace agreement remain, the ECB may afford to pause and adopt a wait-and-see position. The market is optimistic that this pause will not last long; there is over a 50% probability that the ECB will raise rates in June and do so three more times by the end of the year. The situation is too uncertain to take hasty action, but the threats are too great to delay for an extended period. Recently, ECB President Lagarde stated that "the ECB needs additional data before drawing conclusions about policy," while Schnabel indicated that "the ECB can afford time to analyze the shock in Iran."

So, here are the realities. While there are no catastrophic consequences from the war in the Middle East yet, inflation will continue to rise, and real production and consumer demand will decrease. This is a road to recession. For the euro, there might be nothing dangerous here, but the scenario in which capital begins to flee Europe becomes more likely by the day. If the conflict ends quickly, this scenario is less likely to develop; thus, positive news pushes the euro higher. However, each day of delay adds to the unfavorable scenario, increasing long-term threats to the euro, making it unwise, in our view, to bet on its growth.

Speculative positioning in the euro improved by $2.2 billion over the reporting week, but the calculated price has lost its upward momentum and is attempting to reverse downward. There is no clear direction.

Last week, we suggested that the resumption of negotiations between the US and Iran could help the euro rise towards 1.2083, but optimism faded just as quickly. The likelihood of continued growth for EUR/USD is decreasing. The ECB's refusal to raise rates on Thursday will intensify pressure on the euro, making a pullback to support at 1.1620/40 more likely. If negative news increases, then further movement down towards the trendline at 1.1540/60 is also possible.