16.04.202614:14 Forex Analysis & Reviews: EUR/USD drifts near 1.18 as geopolitical uncertainty freezes traders

The euro/dollar pair has been testing the borders of the 1.18 figure for the third day running, that is, the 1.1800 resistance level, which corresponds to the upper line of the Bollinger Bands on the D1 timeframe. For a third consecutive day EUR/USD buyers have refreshed multi-week highs, but ultimately, they have slipped back into the 1.17 area. For example, yesterday, the pair updated a six-week high at 1.1809 but finished the trading day at 1.1799. Today the pair jumped to 1.1824 but then again fell back under the 1.1800 target.

Such trader indecision is quite understandable and justified. Both EUR/USD buyers and sellers are reluctant to open large positions amid an uncertain geopolitical backdrop. The economic calendar for the current week is practically empty for EUR/USD; therefore, all attention is fixed on geopolitics. However, here the picture is highly contradictory as well: the scales can tilt at any moment either toward a de-escalation scenario or toward further escalation.

So, according to the latest information, a second round of talks between the United States and Iran could take place in the coming days. According to several sources, a new meeting of delegations from the two countries will be held at the end of the current week or at the beginning of the next. In anticipation of this event, influential media outlets are publishing their insiders, which are, for the most part, encouraging.

For example, high-level sources cited by Axios report that negotiators have made significant progress and have moved closer to a framework agreement to end the war. According to unnamed White House officials, mediators from Pakistan, Turkey, and Egypt are trying to bridge remaining differences to reach an agreement before the temporary truce expires. The two-week truce expires on April 21. However, Bloomberg reports that Washington and Tehran are considering extending it for another two weeks to allow more time for negotiations.

Incidentally, Donald Trump yesterday said that something very important may happen in the coming days, after which the need to extend the temporary truce would disappear.

In addition, Reuters reports that Iran may allow vessels to pass freely through the Strait of Hormuz on the Omani side — but only if an agreement is reached with the United States that prevents a resumption of the conflict. That is, if the second round of talks is successfully concluded.

But despite the overt and covert diplomatic process, the United States is simultaneously increasing its military presence and tightening the economic blockade of Iran.

As The Washington Post writes, the United States is sending more than 10,000 troops to the Middle East as part of two carrier strike groups. In particular, 6,000 service members are aboard the USS George H.W. Bush, which is currently heading to the region. After its arrival, US command will have three aircraft carriers in the area simultaneously (the USS Gerald R. Ford and the USS Abraham Lincoln are already in the region).

Obviously, this is a form of pressure — part of the US negotiation strategy. Washington is showing that, in the absence of an agreement by the end of the two-week truce, it could move to a forceful scenario. Specifically, this could involve strikes on Iranian energy infrastructure or an attempt to seize Kharg Island, through which about 90 percent of Iran's oil exports transit.

At the same time, unconfirmed reports have appeared in the media that Iran is not wasting time either—allegedly, Iranian forces are regrouping missile assets and strengthening defensive positions in parallel with the talks.

However, it is worth noting that to date Iran's reaction to the maritime blockade of its ports has remained restrained and predominantly verbal. De facto, the parties are observing the truce, holding out hope for a diplomatic settlement of the conflict. Figuratively speaking, the parties have adopted a wait-and-see posture, while keeping powder dry in case of a possible escalation.

EUR/USD traders are adopting a wait-and-see stance as well, avoiding large positions either for or against the dollar. The pair has settled into a drift at the borders of the 1.18 figure, awaiting further events that are expected imminently. Suppose the parties officially agree on a date for the second round of talks; buyers will again attempt to secure a foothold within the 1.18 figure. Conversely, as the truce expiry date approaches (in the absence of signals about talks or its extension), the dollar will likely strengthen, exerting pressure on EUR/USD.

Under such fundamentally driven uncertainty, it is rather difficult to make trading decisions since the scales can tip at any moment either toward further escalation or toward de-escalation. In my view, at present, it is reasonable to consider longs on southern pullbacks in the pair, but strictly on a short-term horizon—with a target of 1.1800 (the upper line of the Bollinger Bands on D1).