Geopolitics continues to dominate the Forex market. If Taiwan emerges as another major flashpoint alongside Ukraine and the Middle East, the US dollar could strengthen significantly—especially given its growing correlation with oil prices. Let's analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- China has issued a warning to the US regarding Taiwan.
- The correlation between oil and the dollar has reached a record high.
- The US economy remains strong.
- Short trades on the EUR/USD pair can be opened with targets of $1.1616 and $1.156.
Weekly Fundamental Forecast for Dollar
A third point of tension may emerge on the world map alongside the two existing ones. China has issued a strict warning to the US regarding military aid to Taiwan, a move that risks escalating into an open confrontation between the two superpowers. Beijing's rhetoric has so alarmed investors that it has triggered a new wave of demand for the US dollar as a safe-haven asset. Coupled with support from US macroeconomic data, these developments pushed EUR/USD quotes to five-week lows.
In April, US retail sales rose by 0.5%, a slowdown from the 1.6% increase in the previous month. In fact, the situation is not as dire as it seems. In March, the index surged due to sharp price increases driven by the conflict in the Middle East. In mid-spring, retail sales were expanding faster than inflation. This means consumers are still contributing to real GDP growth, which is excellent news for the US dollar.
US Retail Sales
Source: Wall Street Journal.
The principle that "economies have strong currencies" remains unchanged. However, there are periods when Forex market movements are driven less by macroeconomic indicators and more by geopolitics, risk appetite, and market momentum. The current oil shock suggests we are in precisely such a phase.
The correlation between oil and the US dollar has climbed to record highs, which may seem counterintuitive at first. Since crude oil is priced in US dollars, the two traditionally move in opposite directions. However, after the United States became a net energy exporter, both the US economy and the dollar benefited from rallies in Brent crude.
Correlation Between US Dollar and Crude Prices
Source: Bloomberg.
Donald Trump's statement about China's willingness to buy more American oil triggered gains in both Brent and the US dollar index.
Developments surrounding Iran also put pressure on the euro. Neither the United States nor China supports the idea of Tehran possessing nuclear weapons or the continued disruption of the Strait of Hormuz. At the same time, Beijing has shown no intention of halting oil purchases from Iran, potentially increasing the chances of a compromise with Washington. With no breakthrough yet in reopening the world's key oil transit route, short positions on the EUR/USD pair remain a viable strategy.
Overall, persistent geopolitical tensions combined with resilient US macroeconomic data continue to support the US dollar.
Weekly Trading Plan for EUR/USD
The EUR/USD pair has broken out of the $1.168–1.178 consolidation range and is moving toward the previously mentioned bearish targets at $1.1615 and $1.156. There is a high probability that the major currency pair will fall even further. The recommendation remains the same: sell.
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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