If the Middle East conflict ends with a peace agreement, the markets will experience a tectonic shift. Investors will actively sell off yesterday’s frontrunners, namely oil and the US dollar. However, it is still too early to talk about de-escalation. Let’s analyze the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The resumption of hostilities is boosting the dollar.
- Oil supplies cannot be restored quickly.
- The Fed’s pause is likely to be prolonged.
- Long and short trades can be opened with targets at 1.18 and 1.15, respectively.
Weekly Fundamental Forecast for Dollar
The US and Iran are standing on the threshold of a historic agreement, but suddenly they start firing missiles at each other. Moreover, this is happening during a ceasefire. The markets have every right to say that they have been deceived again. Meanwhile, the EUR/USD pair has stood still. The euro seems poised to launch a massive counteroffensive, yet hovers indecisively.
The US-Iran agreement will likely trigger a tectonic shift in the markets. The main beneficiaries of the conflict in the Middle East were oil and the US dollar; the losers were gold and Treasuries. Yields on long-term Treasury bonds rose to their highest levels since the 2008 global economic crisis.
US Treasury Yields
Source: Bloomberg.
A peace agreement would dramatically change the situation worldwide. In theory, oil prices and the dollar should fall, gold should rise, and Treasury yields should decline. However, how quickly will these changes unfold? The market believes that even after the Strait of Hormuz reopens, tankers are unlikely to rush through it headlong. Oil tankers must ensure safety is not compromised. The attack by US ships on Iranian boats laying mines, followed by exchanges of missile strikes between the two sides, only fuels fears.
Brent fell below $100 per barrel for the first time since April, thanks to comments from the US administration on progress on the deal, but it is still $20 above its level before the armed conflict in the Middle East. It may take several months to return to pre-war levels. These factors will keep inflation elevated and put an end to Donald Trump’s bold plans to cut interest rates. As Christopher Waller rightly noted, how can any banker talk about easing monetary policy when prices are stuck at high levels, and the labor market has recovered?
Enthusiasm over the conclusion of the US-Iran deal could push EUR/USD quotes significantly higher, but the rally will then slow down considerably, or even reverse entirely, and bears will manage to recoup most of their losses.
That is an optimistic scenario. In a pessimistic scenario, investors can expect a resumption of hostilities in the Middle East. Markets will realize they have been tricked again and will return to buying oil and the US dollar. This scenario should not be ruled out, given Donald Trump’s statement that “the deal with Iran will either be a great and meaningful one, or there will be no deal.”
Weekly Trading Plan for EUR/USD
Given the current uncertainty, it makes sense to focus on two possible scenarios. If tensions de-escalate, the euro can be bought with the target of 1.18. If the conflict escalates further, selling the EUR/USD pair with the target of 1.15 may become the preferred strategy. The 1.163 level continues to act as key resistance.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
