The loss of confidence in the US dollar among international investors has prevented it from rising amid the escalating geopolitical conflict in the Middle East. Investors are turning to other assets. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Bundesbank does not consider the US dollar a safe-haven asset.
- The conflict in the Middle East has not strengthened the greenback.
- The Fed’s passive stance is a safety net for the US dollar.
- Short trades on the EUR/USD pair can be opened on a rebound from 1.1835.
Weekly US Dollar Fundamental Forecast
The situation in the Middle East has forced investors to seek refuge, which the US dollar has not been providing for some time now. As a result, rising oil prices against the backdrop of joint US-Israeli operations against Iran are strengthening the currencies of net oil importers. However, markets act first and think later, so the initial reaction of EUR/USD quotes to the surge in geopolitical tensions may in fact prove to be false.
According to Bundesbank President Joachim Nagel, doubts about the US dollar’s role as a safe haven have recently resurfaced. As a result, the greenback may weaken more amid a loss of confidence from international investors. Indeed, due to the conflict in the Middle East, the US dollar was not popular; gold, the Swiss franc, and US Treasuries were.
Risk-On and Risk-Off Assets
Source: Bloomberg.
Markets are used to the fact that geopolitical turmoil does not last long. Therefore, as soon as information emerged that some Iranian officials were ready to negotiate with the US, oil prices stopped rising, and safe-haven assets retreated.
However, Barclays warns that this time everything may be different. According to Donald Trump, the conflict will last 3-4 weeks, until Tehran capitulates or appoints a US-friendly leader. Therefore, Barclays believes that only a 10% or more decline in US stocks will allow investors to start buying the dip. It is too early to do so at this point.
The longer the conflict lasts, the more investors will think about its consequences for the global economy. Oil-exporting countries, including the US, should benefit from rising oil prices. On the contrary, the eurozone and Japan will be the main losers due to events in the Middle East. On the other hand, Donald Trump is unlikely to want to prolong the confrontation, as this could accelerate US inflation.
US Labor Market Statistics
Source: Bloomberg.
While markets weigh the pros and cons, a key event on the economic calendar looms: the US employment report for February. Investors are wondering whether January’s surge in non-farm payrolls was a one-off event. Perhaps the labor market has recovered after all? In any case, the bar for an early Fed cut in the federal funds rate remains high, and this factor is supporting the US dollar.
Weekly EURUSD Trading Plan
Against this backdrop, a breakout of the resistance level of 1.1835 may be false. Markets are likely to reassess the impact of the conflict, and the Fed’s passivity will act as a safety net for the greenback. Only a confident breakout of this level will provide an opportunity to buy. Otherwise, a rebound from this level will give a sell signal.
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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