The greenback benefits from rising oil prices not only because trading conditions in the US are improving, but also because the US dollar is the primary currency for global energy transactions, and increased demand for it pushes the EUR/USD pair down. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The IEA will release oil from strategic reserves.
- Oil output volumes are declining, while transportation volumes are increasing.
- The correlation between the US dollar and Brent is strengthening.
- Short trades on the EUR/USD pair can be opened if the price fails to rise above 1.164.
Weekly US Dollar Fundamental Forecast
Sometimes the cure is worse than the disease. In 2022, at the start of the Russian-Ukrainian conflict, IEA members voted to release 189 million barrels of oil from strategic reserves to increase supply and lower prices. However, the market was already frightened enough that the news exacerbated the panic, sending Brent up 20% in the week after it broke. The conflict in the Middle East has prompted the US and other countries to sell even more crude than before. How will oil and the EUR/USD pair respond?
The US dollar has become the dominant energy currency, while Brent is driving financial markets. Soaring crude prices not only improve trading conditions in the US but also increase demand for the greenback as a currency for energy transactions. As a net oil exporter, the US is less vulnerable to energy shocks than most G10 countries.
Correlation Between US Dollar and Brent Crude
Source: Bloomberg.
Markets have become so edgy that even posts on social media by Donald Trump and other US officials are triggering reactions. For example, US Energy Secretary Chris Wright said that the US military successfully escorted a tanker through the Strait of Hormuz. Following this report, Brent and WTI prices accelerated their decline, while the EUR/USD pair rose. As soon as Wright’s statement was deleted and the US administration denied the information, oil prices soared, sending the major currency pair tumbling.
In fact, the massive production cutbacks by the Persian Gulf countries suggest that Brent crude is more likely to return to above $100 per barrel than to fall to $70.
Oil Production by Middle Eastern Countries
Source: Bloomberg.
On the other hand, there is some good news. According to Goldman Sachs, over the past four days, oil tanker traffic through the Strait of Hormuz has risen from zero to 1.6 million barrels per day. This is significantly less than the pre-war level of 20 million barrels per day, but it is better than nothing.
Meanwhile, Forex traders are still wondering when the conflict in the Middle East will end. Donald Trump’s statement that the war will be over soon suggests that the US leader is under political pressure. Trump is ready to declare victory and end the conflict. However, Iran may not allow Trump to use his TACO strategy. Such trades were possible because Trump’s counterparts agreed to compromise with the US administration. This time, the situation is different.
Weekly EURUSD Trading Plan
I continue to believe that after sharp fluctuations at the beginning of the confrontation between the US, Israel, and Iran, oil and EUR/USD quotes are beginning to consolidate. At the same time, the 1.164 level is becoming a line in the sand for the euro. If the pair fails to break through this level, short positions can be considered. At the same time, long positions can be opened once the price returns above this key level.
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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