As the conflict in the Middle East has escalated, the US dollar’s share of international payments has risen to its highest level since 2023. Strong demand for the greenback is emerging as a new bearish factor for the EUR/USD pair. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The euro is tracking oil prices rather than the S&P 500.
- Germany has halved its GDP forecast.
- Escalation risks are boosting the US dollar.
- Short positions on the EUR/USD pair can be opened with targets of 1.1635 and 1.159.
Weekly Fundamental Forecast for Dollar
The euro finds itself at a crossroads. Should it follow US stock indices as they hit record highs, or should it pull back in response to soaring oil prices? The EUR/USD pair opted for the latter, recognizing that FOMO in the US stock market will not end well. Indeed, the S&P 500 rally is fueling global risk appetite and putting pressure on the dollar as a safe-haven asset. However, the implications of excessively high Brent prices for the eurozone economy are far more significant.
Meanwhile, Germany has slashed its GDP forecast for 2026 from 1% to 0.5% and for 2027 from 1.3% to 0.9%. The longer the Strait of Hormuz remains blocked, the higher the risks of a surge in oil and natural gas prices. In this case, Europe is likely to face another energy crisis similar to the one four years ago. In 2022, the EURUSD pair fell below parity; it is now holding significantly above it on hopes of a de-escalation of the conflict in the Middle East.
There is, in fact, no end in sight. Donald Trump’s decision to extend the ceasefire indefinitely is being interpreted as a sign of weakness. The dual blockade of this key oil route could escalate at any moment, particularly if either side reacts to attacks or tanker seizures.
Share of US Dollar in International Settlements
Source: Bloomberg.
The renewed demand for safe-haven assets amid the collapse of the second round of US-Iran talks is far from the greenback’s only advantage. According to the Bank for International Settlements, the dollar’s share in international transactions rose in March from 49.2% to 51.1%, notching the highest level since 2023. Demand for dollar liquidity is pushing EUR/USD quotes lower.
The greenback is strengthening despite higher global risk appetite linked to the S&P 500’s record highs. This pattern has occurred before, when the US dollar and the broad equity index moved in tandem. Such cases have typically been linked to US exceptionalism. Notably, a similar scenario is likely unfolding right now.
The US economy is benefiting from disruptions in oil supply. Strong demand from Asia is driving US energy exports to record highs, while equities are rising on optimistic earnings forecasts and undervalued fundamentals following the recent correction.
American exceptionalism allows S&P 500 bulls and EUR/USD bears to coexist harmoniously. Of course, oil is unlikely to return to pre-war levels before the end of 2026. This means the euro’s rally potential is limited. If the market does not go where it is expected to, it is more likely to move in the opposite direction.
Weekly Trading Plan for EUR/USD
Against this backdrop, short positions opened at 1.176 on the EUR/USD pair seem to be the right decision. These positions can be maintained and periodically increased with targets of 1.1635 and 1.159.
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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