EUR/USD is likely to face renewed downward pressure amid prevailing economic and geopolitical factors.

After rebounding from a 1-1/2-month low on Monday, the pair has sparked some bullish sentiment among investors. However, this enthusiasm may be short-lived due to expectations regarding Federal Reserve policy, ongoing tensions with Iran and existing interest rate differentials.

SOFR futures prices rose during Monday's session but have exhibit a downward trend since mid-April, reflecting market anticipation of a hawkish Fed, which rates markets indicate could raise rates in early 2027 .

This shift has helped send the U.S.-German 2-year yield spread to its widest level since March 5, enhancing the dollar's appeal over the euro. Should the Fed's interest rate trajectory become hawkish it would likely trump and bulllish policy influence from the European Central Bank, which could exert downward pressure on EUR/USD.

Moreover, lingering tensions between the U.S. and Iran continue to buoy oil and commodity prices, adversely impacting the European economy. Should these prices remain elevated, the euro may struggle to gain upward traction.

Technically, the pair remains below its 200-day moving average, with the monthly RSI indicating a bearish trend and an inverted hammer pattern signaling potential weakness.

Unless the dollar's yield advantage diminishes or geopolitical tensions ease, the likelihood of EUR/USD trading lower remains.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)