It is commonly believed that central banks take away the punch bowl during a global economic party. Notably, when they tighten monetary policy to curb inflation and prevent overheating, a recession usually follows. This time, it may be the oil crisis that forces them to take such action. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Brent is growing at its fastest pace since 2020.
- Crude may surge to $200 per barrel.
- The Fed may refrain from cutting rates in 2026.
- Short positions on the EUR/USD pair can be opened with the target of 1.1.
Monthly US Dollar Fundamental Forecast
Donald Trump believes that preventing Iran from acquiring nuclear weapons and posing a threat to the entire Middle East is more important than oil prices. Tehran will seek to completely close the Strait of Hormuz and explore other fronts in the war if the US and Israel continue to bomb Iran. Markets understand that the conflict will be long-lasting. As a result, Brent has seen its strongest daily rally since May 2020, while the EUR/USD pair is teetering on the edge of the abyss.
This is how the global economy collapses. The IEA calls the current supply disruption the largest in history, markets are discussing a surge in Brent crude to $150 per barrel, and the futures market is increasing the chances that the Fed will not cut the federal funds rate in 2026, from 4% before the war in Iran to 45%. The probability of two rate cuts has plummeted from 79% to 16%.
Market Expectations for Fed Funds Rate
Source: Wall Street Journal.
Other central banks are following suit. The futures market has largely ruled out the possibility that the Bank of England will cut the repo rate twice this year, while the probability of a single rate cut is now roughly fifty-fifty. The European Central Bank may even raise the deposit rate twice, although before the conflict in the Middle East, investors expected it to remain unchanged. The higher the cost of borrowing – and the corresponding rise in yields across global debt markets – the more difficult it becomes for the global economy to maintain momentum. An oil crisis could ultimately lead to stagflation and even a recession. In such a scenario, the US economy and the US dollar – both relatively more insulated from the conflict in Iran – could benefit.
As a result, one-month risk reversals on the USD index have reached their highest levels since the end of 2022. Investors are paying more to hedge against a strengthening greenback than to insure against its weakness. This suggests that the market sees a decline in EUR/USD as more likely than a rise.
US Dollar Risk Reversals
Source: Bloomberg.
Against the backdrop of forecasts by Macquarie Group that Brent crude could rise to $150 per barrel if the Strait of Hormuz remains closed for several weeks, such expectations appear logical. Wood Mackenzie argues that even $200 per barrel cannot be ruled out. Meanwhile, Goldman Sachs, in its pessimistic scenario, estimates the average Brent crude price at $145 per barrel in March and April.
Add to this Iran’s potential use of naval mines and the Houthis’ intention to block the Bab el-Mandeb Strait – a chokepoint through which about 12% of global seaborne oil flows passed before the war – and the situation begins to look truly critical.
Monthly EURUSD Trading Plan
The targets for previously formed short positions on the EUR/USD pair at 1.145 and 1.135 are within sight. The longer the Strait of Hormuz remains closed, the higher the likelihood that the major currency pair will fall below 1.1. The recommendation remains unchanged: 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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