The Middle East conflict was expected to end quickly. As a result, the US dollar, oil prices, and Treasury yields should have fallen, while the S&P 500 index was projected to rise. However, the third week of the conflict is throwing a wrench into the US administration’s plans. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The third week of the US–Iran conflict has begun.
- Investors cannot count on the TACO trade yet.
- The US administration’s plans are derailing.
- Short trades can be considered as long as EUR/USD quotes remain below 1.15.
Weekly US Dollar Fundamental Forecast
If Iran wants to force the US to retreat by inflicting more economic pain on Americans, it clearly does not understand how the global economy works, according to Kevin Hassett, Donald Trump’s chief economic adviser. However, the markets tell a different story. The longer the United States remains entangled in the Middle East conflict, the less likely it is that the administration’s economic goals, including weakening the US dollar, will be achieved.
Treasury Secretary Scott Bessent has promoted a “3-3-3” framework: 3% GDP growth, a budget deficit reduced to 3% of GDP, and an additional 3 million barrels per day of oil production. When combined with the US leader’s clear preference for a strong S&P 500 and a weaker dollar, recent market moves suggest the plan is facing serious headwinds.
Performance of US Dollar, Brent, 10-Year Treasury Bond, and S&P 500
Source: Bloomberg.
The conflict in the Middle East has pushed Brent crude toward its highest levels since the summer of 2022. At the same time, US Treasury yields have moved above 4.25%, reflecting fears of a widening fiscal deficit and growing expectations that the Federal Reserve may keep interest rates higher for longer. The US dollar is strengthening rapidly as investors seek safe-haven assets, and the United States benefits from its status as a net energy exporter. Economic momentum is also cooling, with GDP growing by a sluggish 0.7% in the fourth quarter after expanding by 4.4% in the third quarter. Against this backdrop, pressure on Donald Trump is increasing as weaker economic sentiment weighs on approval ratings ahead of the midterm elections.
The US administration appears to have counted on a quick and decisive outcome in its confrontation with Tehran. Such a scenario would have encouraged investors to revive the so-called TACO trade — “Trump Always Chickens Out” — selling oil and the dollar while buying the S&P 500 and US Treasuries. The problem is that Iran shows no sign of backing down.
Against this backdrop, Donald Trump has to resort to his old tricks. If there is no victory, he will make one up. According to the US president, Tehran is ready to retreat, but the US has not yet achieved its objectives. Iran immediately denied this statement, making it clear that the US president is confusing wishful thinking with reality. Without a rapid resolution, Washington has limited tools to quickly stabilize the energy market. Proposals to release additional oil from the US Strategic Petroleum Reserve or to organize international tanker escorts through the Strait of Hormuz have so far failed to calm markets.
Weekly EURUSD Trading Plan
If Iran refuses to back down, Washington is likely to remain engaged in the conflict. As a result, the third week of the Middle East confrontation may resemble the previous two. Brent, the US dollar, and US Treasury yields are climbing amid persistent geopolitical risks, while the S&P 500 index remains under pressure. In this connection, as long as the EUR/USD pair remains below 1.15, the bias should remain toward short positions.
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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