The prospect of peace in the Middle East has put the US dollar in a difficult position. As geopolitical tensions ease, assets are retreating to their previous levels. The USD index is no exception. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Investors are optimistic about peace in the Middle East.
- The weekend brought an escalation of the conflict.
- Two-sided risks should be considered.
- A resumption of the conflict provides an opportunity to sell EUR/USD at 1.173.
Weekly Fundamental Forecast for Dollar
A ceasefire agreement has reportedly been all but finalized. Iran has agreed to suspend its nuclear program indefinitely and announced the full reopening of the Strait of Hormuz, while Israel and Lebanon are engaged in negotiations. However, most of these developments emerged on Friday, and many appear to have been driven more by Donald Trump's statements than by confirmed agreements. Over the weekend, the US seized an Iranian tanker, and Tehran is now threatening to walk away from talks with Washington at the eleventh hour.
Events are unfolding at a breakneck speed, and the direction keeps shifting. From de-escalation to escalation and back again. Needless to say, the USD index has lost all its gains due to the war in the Middle East, and the EUR/USD pair began the new trading week with a gap-down, the second in a row. The first one was filled thanks to Donald Trump's conciliatory rhetoric. This time, instead of a carrot, the US president has chosen a stick. He is threatening to bomb every power plant and every bridge in Iran if the country does not agree to a deal.
US Dollar Performance
Source: Bloomberg.
Investors' behavior is easy to understand. For decades, geopolitical shocks have unsettled markets, only for conditions to return to normal. That pattern has become something investors rely on. So when signs of a potential end to the Middle East conflict emerged, FOMO — the fear of missing out — kicked in. US stock indices hit record highs, global bond yields declined, and the US dollar index dropped sharply, with its March gains viewed as a routine correction. Meanwhile, concerns about the dollar's long-term weakness — driven by political instability, pressure on the Fed, eroding credibility, and monetary expansion — have not gone away.
Government Bond Yields
Source: Bloomberg.
The problem is that markets have grown accustomed to taking Donald Trump at his word, even when he blurs the line between wishful thinking and reality. Iran has brushed off US demands as unrealistic and is hinting at derailing the negotiations once again. The country made similar threats just a week ago, but this time, the stakes are higher as the two-week ceasefire nears its expiration.
If US stock indices react negatively to an escalation of the conflict in the Middle East, or if a second round of talks between Washington and Tehran fails — as the first did — the reaction in dollar pairs on Forex could be markedly different from what we saw a week ago. There is no guarantee that investors will buy into Donald Trump's narrative again. In that case, the US leader may feel compelled to follow through on its threats, potentially leading to a significant escalation, including strikes on critical infrastructure.
Weekly Trading Plan for EUR/USD
Traders should account for two-sided risks. A de-escalation of the conflict could push EUR/USD quotes back above 1.1755, creating an opportunity to add to long positions initiated at 1.173. Conversely, in the event of escalation, short positions can be considered below 1.173.
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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