The US president stated that Iran has fulfilled most of his 15 demands. However, instead of ending the war, the US is planning a ground operation. The escalation of the conflict benefits the greenback. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Central banks are preparing for a recession.
- Escalating geopolitical tensions are supporting the US dollar.
- The markets are doing the Fed and the ECB’s job for them.
- Short trades on the EUR/USD pair can be opened with targets of 1.145 and 1.135.
Weekly US Dollar Fundamental Forecast
When doves turn into hawks and hawks urge caution, the world is sliding toward a recession. In Europe, the first signs of a sharp acceleration in consumer prices are emerging; the EU is raising its inflation forecasts and lowering its GDP projections. As the Middle East conflict escalates, macroeconomic data and monetary policy fall to the background, and oil comes to the forefront.
Donald Trump shifts his stance frequently, and the markets respond accordingly. The US leader, in order to avoid crashing stock indices, issues ultimatums over the weekend and then cancels them on Monday. As a result, traders prefer to close their positions on Friday evening, which supports EUR/USD bears amid fears of an escalation of the conflict in the Middle East.
USD Risk-Reversal Spread
Source: Bloomberg.
Indeed, Donald Trump’s ideas about seizing Harg Island or launching a military operation aimed at seizing 1,000 pounds of Iranian uranium do not bode well for the markets. Oil prices are soaring, and the risks of a reversal in the US dollar signal a continuation of the decline in the EUR/USD pair. This is especially true given that the Houthis are joining the conflict in the Middle East. They control the Bab el-Mandeb Strait, through which about 12% of global oil supplies pass.
Realizing that the conflict is dragging on, the EU has lowered its economic growth forecast by 0.4 percentage points to 1% for 2026 and raised its inflation forecast by 1 percentage point to 3.1%. The first signs of accelerating inflation in March are appearing in Spain, where consumer prices jumped from 2.5% to 3.3%.
Growing risks of stagflation are forcing Bank of France Governor François Villeroy de Galhau, a prominent dove, to speak of the need to raise rates. Conversely, Isabel Schnabel, known as a hawk, suggests not rushing to tighten monetary policy.
Most FOMC officials appear inclined to keep the federal funds rate unchanged, even as derivatives markets price in a rising probability of further tightening. In effect, financial markets are doing some of the Fed’s work for it. The increased expectations of policy tightening are already reflected in higher Treasury yields and mortgage rates, which, in turn, help moderate inflationary pressures.
Share of US Dollar in Settlements and Reserves
Source: Bloomberg.
One could debate whether a prolonged conflict in the Middle East will ultimately impact the US dollar’s role in global transactions and foreign exchange reserves. For now, however, as oil prices climb, demand for the greenback to finance energy-related trade grows.
Weekly EURUSD Trading Plan
In addition, given that the economic impact of the ongoing conflict is more severe for the eurozone than for the US, the decline in EUR/USD appears to be a natural development. Any upturn can be viewed as an opportunity to sell the euro toward the targets of 1.145 and 1.135.
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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