Markets had been counting on a de-escalation of the conflict in the Middle East and were actively selling the US dollar. However, the news that Washington and Tehran had failed to reach an agreement dealt a blow to investors. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
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Negotiations between the US and Iran have been unsuccessful.
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Core inflation in the US is not rising.
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The Fed will not raise interest rates.
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Short positions can be considered if the EUR/USD pair breaks through 1.166.
Weekly Fundamental Forecast for Dollar
From a reversal in dollar trading to a new wave of escalation. The collapse of the US-Iran talks has come as a major shock to financial markets. The negotiations lasted more than 20 hours, and according to Donald Trump, nearly all points had been agreed upon except for the most crucial one – the nuclear program. Tehran notes that the parties were just inches away from an agreement and calls the US demands extreme. Against this backdrop, the EUR/USD pair has opened this week with a gap down, awaiting further news on the Middle East conflict.
If the greenback was the main beneficiary of the conflict, it should have been significantly weakened following its conclusion. Indeed, measures related to the so-called cross-currency basis – the additional costs investors incur or receive from seeking dollars abroad rather than in the US – signaled a decline in demand for the US currency.
Demand for US Dollar Against Euro and Swiss Franc
Source: Bloomberg.
With the US dollar market reversing direction, EUR/USD bears could hardly count on support from US inflation data. While consumer prices rose by 0.9% month-over-month in March, this figure was in line with forecasts. Moreover, second-order effects have not materialized yet. Core inflation rose by a modest 0.2% month-over-month and 2.6% year-over-year. Notably, both figures came in below expectations.
US Inflation
Source: Wall Street Journal.
Prior to the publication of the data, markets were confident that Fed officials would carefully examine how high energy prices are affecting the economy. If no second-order effects emerge, it would be premature to discuss raising the federal funds rate. Against the backdrop of de-escalation in the Middle East, conditions favored buying the EUR/USD pair. That was indeed the prevailing trend – until news broke that US–Iran negotiations had collapsed.
Everything is back to square one. The US naval blockade of the Strait of Hormuz, designed to prevent even a fly from passing through, is keeping the geopolitical conflict dragging on. The US will not let through not only Iranian tankers, but also those that have paid Tehran for transit. Oil prices risk climbing even higher, and the global economy risks slowing down even further. As a result, demand for the greenback as a safe-haven currency will resurface. Moreover, Iran also has options for escalation. For example, it could block the Bab el-Mandeb Strait.
At the same time, there is another scenario. The failure of the negotiations does not mean that new ones will not begin soon. Donald Trump will continue to spark public interest in this issue. The US president has already stated that Iran wants to return to the negotiating table. Hopes for a second round will support the euro.
Weekly Trading Plan for EUR/USD
Sometimes, you have to fall before just to rise again. Short positions can be considered if the pair fails to close the gap formed at the start of the week, or if EUR/USD quotes slide below 1.166.
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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