The US economy will suffer far less from the Middle East conflict than Europe’s. This realization is bringing American exceptionalism back into focus and driving EUR/USD lower. Let’s discuss this and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- The US keeps extending ultimatum deadlines.
- The US economy is suffering less than Europe’s.
- Central banks risk making mistakes by raising rates.
- Short positions in EUR/USD with a target of 1.135 remain relevant.
Weekly Fundamental Forecast for Dollar
“Open the strait, or you will live in hell!” If Donald Trump’s harsh rhetoric could end the Middle East conflict, it would have done so already. In reality, it reflects growing frustration. The deadline of the previous US ultimatum to Iran is expiring, only to be replaced by a new one, now set for Tuesday. This pattern repeats itself. Prediction markets are losing confidence in the Republican’s statements and are lowering the odds of a near-term resolution. The US dollar continues to rally, and it remains unclear what could stop it.
Probability of the Middle East Conflict Ending
Source: Bloomberg.
Everything takes time. While a month of armed conflict in the Middle East and the associated rise in oil prices have so far had a limited impact on the economy, thanks to strong energy supply in February, the situation is likely to worsen. However, the effects will vary across regions. The conflict is bringing the theme of American exceptionalism back to the markets.
Citi has lowered its eurozone growth forecast by 0.4 percentage points, while cutting the US forecast by only 0.1 percentage points. The key reason is that Europe’s net imports of oil and liquefied natural gas account for 1–2% of GDP, while the US net exports stand at 0.2%.
Share of Energy Exports and Imports in GDP
Source: Wall Street Journal.
A strong economy supports a strong currency. This fundamental principle remains unchanged. Americans will suffer less from the Middle East conflict than Europeans, which is one of the reasons behind the decline in EUR/USD.
The ECB’s attempt to slow the euro’s decline through hawkish rhetoric only temporarily restrained bearish pressure. Markets are increasingly recognizing that central banks’ efforts to avoid repeating the mistakes of 2022 may lead to even bigger missteps.
Four years ago, the ECB was too slow to raise rates, allowing inflation to rise into double digits. However, in 2022, inflation was driven by post-pandemic demand. Now, the issue is constrained supply. While central banks know how to deal with excessive demand, they have limited tools to address supply shortages. After all, you cannot print oil.
The best approach is to wait. US labor market data gives the Fed room to stay on hold. Nonfarm payrolls in March posted the strongest growth in more than a year. The unemployment rate fell from 4.4% to 4.3%. The labor market is stabilizing, reinforcing the return of American exceptionalism and supporting the US dollar.
Weekly Trading Plan for EUR/USD
Without strong confidence in a near-term resolution of the Middle East conflict, EUR/USD may continue to decline as the negative effects of the oil crisis spread through the global economy. Selling the euro with a target of $1.135 remains a valid strategy.
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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