02.04.202600:35 Forex Analysis & Reviews: The Dollar is Exiting the Conflict

Donald Trump has convinced the markets that the armed conflict in the Middle East will last another 2-3 weeks. However, it seems that no one has informed Iran. It continues its bombardments of countries in the Persian Gulf and receives missiles from the US and Israel in return. The war shows no signs of stopping, but EUR/USD is rising. The markets, as usual, shoot first and ask questions later.

Efforts from both sides are needed for a peace agreement. Donald Trump claims that Tehran has met most of the 15 US demands. Apparently, Iran will no longer be able to produce nuclear weapons, and it will take 15-20 years to rebuild the country. Add to this the change in government to one less aggressive toward Americans, and the occupant of the White House has grounds to withdraw from the Middle East.

A prolonged conflict threatens to accelerate US inflation, something the president does not want. Yes, consumer prices may initially soar, but secondary effects could also push core inflation higher. Markets and Bloomberg experts are raising their forecasts for it. As a result, Trump's dream of reducing the federal funds rate will not come true. With or without a new chairperson, FOMC members will keep borrowing costs at 3.75%.

Inflation Forecasts in the US

A combination of high oil and gasoline prices, on the one hand, and high interest rates, on the other, is a volatile mix. It will surely lead to a recession in the US economy. At the same time, Goldman Sachs warns that a change in investor sentiment could weaken the US dollar. During the armed conflict in the Middle East, the greenback rose due to fears of stagflation. If markets begin to fear a downturn, Treasury yields will fall, pulling the USD index down with them.

At first glance, the euro could be a beneficiary of a resolution to the conflict between the US and Iran. The export-oriented Eurozone is highly sensitive to global economic conditions. If global GDP growth remains unchanged, EUR/USD may continue its rally.

In reality, the currency bloc's dependence on oil and gas has not gone away. The departure of Americans from Iran does not automatically mean the reopening of the Strait of Hormuz. Brent will continue to trade at elevated levels compared to pre-war benchmarks. Additionally, rebuilding infrastructure will take time, which will temper the bullish enthusiasm for the main currency pair.

Technically, the daily chart of EUR/USD is forming a 1-2-3 reversal pattern. To activate it, a breakout above point 2 is needed. This point is located at the upper boundary of the fair value range of 1.149-1.1635. A confident test will allow for the accumulation of long positions formed from 1.149. Conversely, the bulls' inability to break above this level serves as a reason to transition from buying to selling euros against the US dollar.