The strengthening of the US dollar in response to the conflict in the Middle East was an expected development in the Forex market. However, Donald Trump had previously welcomed the weakening of the greenback. Have his priorities changed? Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US dollar has recorded its strongest rally since January.
- The currencies of oil-exporting countries are seeing gains.
- The euro is suffering due to the energy crisis.
- Short trades on the EUR/USD pair can be opened with targets of 1.1615 and 1.159.
Weekly US Dollar Fundamental Forecast
Be wary of your desires. Donald Trump's desire to bring Iran to heel proved so strong that the US president completely forgot about the consequences. Oil prices and US inflation are rising, Treasury bond yields are increasing, the Fed intends to extend its pause in the monetary expansion cycle, and the dollar is finally gaining traction! All these developments are completely at odds with the previously announced goals.
The conflict in the Middle East forced yesterday's US dollar bears to abandon their plans. JP Morgan admitted defeat and said that in the short term, the USD index would strengthen. Allianz Global Investors is openly calling on investors to buy greenbacks. At the same time, the sharpest daily decline in EUR/USD quotes since January is being driven by the unwinding of speculative shorts on the US dollar. In February, they reached a five-year high.
Speculative Positions on US Dollar
Source: Bloomberg.
Instead of "Sell America," the markets are dominated by completely different sentiments. The dollar is outperforming its competitors along several fronts as the currency of a net exporter of energy commodities and a safe-haven asset, thanks to the rally in Treasury bond yields, which increases the attractiveness of US-issued assets, and due to the growing risks of accelerating inflation and the Fed keeping federal funds rates high for a long time.
Indeed, the greenback has become the most preferred currency against the currencies of oil- and gas-importing countries, such as the Swedish krona, the British pound, and the euro. In contrast, the US dollar's gains against the Norwegian krone and the Canadian dollar have proved limited.
US Dollar's Performance Against G10 Currencies
Source: Bloomberg.
Europe appears to be the main victim of the conflict in the Middle East. Qatar, a supplier of LNG to the region, has cut production, sending natural gas prices soaring by 39%. By comparison, prices in the US rose by only 3.5%. This created a sense of déjà vu. Just as in 2022, amid the outbreak of armed conflict in Ukraine, the eurozone may face an energy crisis. This will slow down the economy and accelerate inflation.
Four years ago, capital inflows from Europe to the US fueled American exceptionalism. The current situation has much in common with those events, so the EUR/USD pair's collapse seems inevitable. The only questions are: how long will the conflict in the Middle East last, and how will it affect oil supplies?
Weekly EURUSD Trading Plan
As a result, the EUR/USD pair has reached both of the previously announced bearish targets at 1.171 and 1.168. Continued oil rally may push the euro down to 1.1615 and 1.159. Against this backdrop, short trades can be considered.
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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