Weak US inflation is failing to encourage EUR/USD bulls to step up buying. At the same time, oil prices have become the dominant factor, overshadowing Fed policy and interest rates. Rising oil prices are supporting demand for the US dollar. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The release of strategic oil reserves is failing to pressure oil prices.
- Weak US inflation is providing little support for the euro.
- The rally in Brent is paving the way for further gains in the US dollar.
- Short trades on the EUR/USD pair can be opened with targets at 1.145 and 1.135.
Weekly US Dollar Fundamental Forecast
Donald Trump claimed that American ships would escort vessels through the Strait of Hormuz. However, given that Iran has destroyed five tankers and is equipped with submarines and naval mines, the operation would be unsafe for the military. The US leader assured that the conflict in the Middle East would soon end and oil prices would fall due to a large-scale release of strategic reserves. Yet there is no end in sight to the confrontation, and financial markets remain confident in their predictions, driving the EUR/USD pair lower.
At first glance, 400 million barrels seems like a colossal figure, more than double the amount of oil sold from strategic reserves at the start of the armed conflict in Ukraine. However, this covers only four days of global oil demand. According to Capital Economics, IEA members have never released more than 2.5 million barrels per day into the market. Before the conflict, about 20 million barrels per day passed through the Strait of Hormuz.
OECD Oil Reserves
Source: Bloomberg.
Apparently, strategic reserves will not solve the problem. They are merely a drop in the ocean, and the decision to sell oil has likely frightened the market rather than calmed it. As a result, Brent is once again moving towards the psychologically important level of $100 per barrel, prompting the EUR/USD pair to continue its downward trend.
The US Energy Information Administration has revised its forecast for the average price of Brent crude from $58 to $79 per barrel in 2026 and from $53 to $64 per barrel in 2027. The EIA understands that the conflict in the Middle East will have lasting effects. Even if it ends today, it will take a long time for oil flows through the Strait of Hormuz to fully recover. Suffice it to recall the situation in the Red Sea. Even six months after the Houthi attacks ceased, traffic has not returned to normal. It seems that high oil prices are set to persist for a long time.
US Inflation
Source: Wall Street Journal.
Against this backdrop, the EUR/USD pair showed a rather calm reaction to the lack of acceleration in US consumer prices. Current inflation levels of around 2.4–2.5% leave room for the Fed to consider rate cuts. However, February’s data may now serve as a baseline because the recent rally in Brent crude is likely to exert upward pressure on US inflation in the coming months. The key question is how strong the acceleration will be.
The European Commission expects inflation in Europe to rise to 3%, while economic growth may slow by 0.4 percentage points due to the conflict in the Middle East. At the same time, a repeat of the 2022 European energy crisis appears unlikely. Whether this will prevent the euro from falling below parity with the US dollar remains to be seen.
Weekly EURUSD Trading Plan
The EUR/USD pair has rebounded from the 1.164 resistance level. Bearish targets at 1.145 and 1.135 remain unchanged. Short positions opened near resistance can be maintained, and the overall selling bias remains in place.
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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