While at the outset of the armed conflict in the Middle East, oil prices, Treasury bond yields, and the US dollar were all moving in the same direction, everything changed in July as US inflation slowed. Let’s discuss this topic and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The correlation between oil and Treasuries has changed.
- Producer prices indicate that inflation has peaked.
- Remarks by FOMC officials are weakening the US dollar.
- A decisive break above 1.147 will give a buy signal.
Weekly Fundamental Forecast for Dollar
If the US wants to take control of the Strait of Hormuz, it must first secure the area. Donald Trump’s rhetoric is sounding increasingly aggressive, but rising oil prices are not leading to a rally in Treasury bond yields, as was the case at the start of the armed conflict in the Middle East. On the contrary, Treasury yields are falling, which is weakening the US dollar and pushing the EUR/USD pair higher.
WTI Futures and US 2-Year Treasury Yield
Source: Bloomberg.
The prevailing market narrative is that while oil prices may rise, they are unlikely to reach the levels seen in March. The market has adjusted to the blockade of the Strait of Hormuz: it has found alternative routes and cut demand. The peak has passed, and if that is the case, then US inflation has also peaked. This is confirmed both by the month-over-month decline in the Producer Price Index and statements by Fed officials.
The 0.3% drop in the PPI suggests that the Personal Consumption Expenditures Index—the Fed’s preferred inflation gauge—rose by 0.1–0.2% in June. This modest trend allows the central bank to extend its pause. According to John Williams, monetary policy is well positioned: rates are at a level capable of curbing price growth. The New York Fed President believes that oil prices have peaked. It is quite possible that AI-driven inflation has also peaked amid waning enthusiasm for artificial intelligence technologies.
In his testimony before Congress, Kevin Warsh noted that the impact of AI on the economy is not necessarily inflationary. Indeed, substantial investments in new technologies have already affected prices, but what will happen in 12 months? Will productivity gains offset this impact?
CPI and PPI trends, a potential slowdown in PCE, and FOMC officials suggesting inflation has peaked are prompting futures markets to lower the odds of monetary policy tightening. In July, those chances fell from 40% to 10% over two days. The probability of two rate hikes during this period dropped from 58% to 29%. This explains the divergence in the trends of oil prices and Treasury yields. Previously, these assets moved in the same direction; now their paths have diverged.
As a result, the US dollar has come under pressure. At first glance, it seems counterintuitive: the greenback cannot benefit from its status as both a safe-haven asset and the currency of a net energy exporter. However, if the US stock market was able to adapt to the conflict in the Middle East as early as April, why shouldn’t the Forex market do the same?
Weekly Trading Plan for EUR/USD
Eventually, even Donald Trump’s harsh rhetoric may prove part of his strategy, so if the EUR/USD pair breaks through 1.147, investors will still have an opportunity to add to long positions established near the lower boundary of the 1.137–1.147 consolidation range.
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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