Donald Trump says one thing, while Iran and Hezbollah say something completely opposite. Investors do not know who to believe. As a result, oil and the EUR/USD pair are fluctuating wildly. Meanwhile, the markets are expecting a signal from US employment data. Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Turmoil continues in the oil market.
- The correlation between Brent and the US dollar is likely to strengthen.
- Investors are puzzled by the news.
- Short trades can be opened if the EUR/USD pair slides below 1.1595.
Weekly Fundamental Forecast for Dollar
Oil remains the central driver of global markets. The crude oil market resembles a leaky bucket, with limited inflows from weakening Chinese demand and rising US exports. Yet underlying supply gaps persist, and reserves are rapidly depleting toward critical levels, pushing Brent prices higher. In turn, this is likely to drive a rally in bond yields and strengthen the US dollar.
Crude Oil Price and 10-Year Treasury Yield
Source: Bloomberg.
According to more than half of the 124 investors who participated in the MLIV Pulse survey, the strong correlation between the greenback and oil futures will intensify. More than a third of respondents believe these assets will fall in tandem.
This contradicts their view on the future of the federal funds rate. Slightly more than 15% expect the Fed to ease monetary policy. The majority believe the rate will remain at least at current levels or rise.
Investors' Forecasts for the Fed Rate
Source: Bloomberg.
If the Fed does indeed resort to monetary tightening, more aggressive action by its counterparts will be needed to weaken the US dollar. For this to happen, the conflict in the Middle East must continue, and Brent crude prices must rise.
Thus, the MLIV Pulse survey reveals that investors are confused. This is hardly surprising because geopolitical news is a jumble of conflicting reports. Iran claims there has been no progress in negotiations with the US, but Donald Trump insists they are in the final stages. Hezbollah announces it has no intention of adhering to the ceasefire with Israel, yet the US president claims to have received a call from them to discuss the terms of a truce.
It seems that progress in negotiations with Iran exists only in the US president's head. However, markets continue to react to positive news from the Middle East for one reason: sooner or later, it will come true. The conflict will end, and investors unwilling to sell oil and the US dollar will be left empty-handed.
However, if the Strait of Hormuz remains closed, the oil market will suffer even more, and neither Chinese imports nor US exports would be enough to stabilize it. In that scenario, the USD index rally would be unstoppable.
The EUR/USD pair is oscillating between two scenarios, resulting in medium-term consolidation. Investors are closely watching the US labor market data. TD Securities warns that an unexpected rise in unemployment from 4.3% to 4.4% could give Kevin Warsh grounds to advocate for a rate cut, which would likely weigh on the greenback.
Weekly Trading Plan for EUR/USD
Strong employment data, combined with ongoing tensions in the Middle East, will likely fuel the continued decline in EUR/USD quotes. If the price pierces the 1.1595 support level, short positions can be opened.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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