12.05.202601:08 Forex Analysis & Reviews: Dollar is Racing Against Time

While oil is racing against time, EUR/USD continues to rise. Morgan Stanley coined the phrase that clearly describes the situation in the oil market. Despite the scale of the crisis, Brent has yet to reach the levels seen at the beginning of the armed conflict in Ukraine. This is largely due to the rise in American imports and a reduction in Chinese imports. However, nothing is eternal under the sun.

Before the Middle East crisis, the oil market could confidently be labeled as "bearish." A significant surplus was expected, and the world had accumulated substantial supplies. These reserves are effectively capping Brent's rise, along with Saudi Arabia and the UAE's redirection of flows, increased production in the US and Brazil, and reduced demand from China and other countries. Nevertheless, Morgan Stanley believes that if the Strait of Hormuz remains closed until June, black gold will soar to new heights.

Along with it, inflation will accelerate. Given the aggressive "hawkish" rhetoric from the European Central Bank, Bloomberg experts have increased their projected number of monetary tightening acts from 1 to 2 by 2026. The current figure aligns more closely with the expectations of the futures market.

ECB Rate Predictions

Meanwhile, CME derivatives continue to give over a 70% probability of maintaining the federal funds rate at 3.75% until the end of the year. The divergence in monetary policy allows EUR/USD to trade near the upper boundary of the consolidation range of 1.17-1.18.

In fact, ECB Vice President Luis de Guindos calls for caution and sincerely hopes for an improvement in the eurozone economy to enable a tightening of monetary policy. Otherwise, the ECB will face a difficult choice: let inflation run free or ruin the economy?

In my view, the Federal Reserve is in a much easier position. The latest employment report confirmed the strength of the labor market. Now, the FOMC can focus its attention on inflation with a clear conscience. Consumer prices, according to Bloomberg experts, are expected to surge by 3.6% in April. They are significantly moving away from the target. The Fed may place obstacles in the CPI's upward path by starting to discuss interest rate hikes, which would strengthen the US dollar.

However, the fate of the greenback ultimately depends on whether oil loses the battle against time. A prolonged blockade of the Strait of Hormuz could drive Brent up to $150 per barrel and possibly higher. In that case, a renewed interest in safe havens would support the US dollar.

Technically, on the daily chart, EUR/USD has seen its fourth test of the upper boundary of the fair-value range (1.168-1.178) over the last four trading days. A rebound from this important resistance will provide a reason to sell. Conversely, a consolidation above $1.178 will provide grounds to buy euros.