Iran views the US blockade of the Strait of Hormuz as a threat to diplomacy and a violation of the ceasefire. The risks of conflict escalation are rising, which is supporting the US dollar. Let's analyze the situation and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Global PMIs are slowing down.
- The risks of global stagflation are rising.
- US exceptionalism is supporting the dollar.
- Short trades on the EUR/USD pair can be opened below 1.169.
Weekly Fundamental Forecast for Dollar
When the global economy begins to show signs of strain amid the oil market crisis, the US dollar will become more than just a safe-haven asset. The EUR/USD pair has declined in five of the past six trading days, driven by rising risks of renewed geopolitical tensions in the Middle East and capital flight to the US, fueled by perceptions of American exceptionalism.
Recent business activity data has reinforced investors' concerns. The global economy appears to be heading toward stagflation. In the United States, prices have risen at the fastest pace in 11 months; in Europe, at the fastest pace in three years; and in Japan, at the fastest pace since 2007. Meanwhile, the Purchasing Managers' Index (PMI) for the eurozone has fallen below the critical 50 threshold, reaching a 17-month low.
Eurozone PMIs
Source: Bloomberg.
The services sector has suffered the most, with companies facing rising costs and passing them on to consumers. The manufacturing sector is buoyed by increased inventory buildup due to the oil crisis, just as it was ahead of Donald Trump's import tariffs. However, as experience from those times shows, this upward momentum is likely to fade quickly. Capital Economics admits that the blow to the global economy from the conflict in the Middle East has been greater than anticipated.
While Asia and Europe suffer, the US reaps the benefits. Just as during World War II and the armed conflict in Ukraine, its economy is benefiting. According to the Energy Information Administration, US exports of crude oil and petroleum products have reached a record high of 12.9 million bpd. Donald Trump appears to be profiting from the blockade of the Strait of Hormuz.
US Oil and Petroleum Products Exports
Source: Wall Street Journal.
Officially, the US administration says it is waiting for proposals from Iran. However, Iran has no intention of making any as long as the US continues to block the world's key oil route. Tehran calls such actions either a violation of the ceasefire or a major threat to diplomacy.
The situation has reached a deadlock, and along with oil prices, the risks of a conflict escalation in the Middle East are rising. Just a week ago, investors were confident that an end was in sight. Now, however, fears that hostilities could resume are driving them to seek refuge in the US dollar.
Of course, Donald Trump's conciliatory rhetoric could trigger a rebound in the euro, but without clear signs of a resolution to the Middle East conflict, the risk of a decline in the major currency pair remains high.
Weekly Trading Plan for EUR/USD
Traders should stick to a strategy of keeping short positions initiated at 1.176 open on the EUR/USD. If the euro fails to rise above 1.169, short positions can be increased.
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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