- Europe is an unwitting victim of the Middle East conflict.
- The increasing probability of two ECB rate hikes is not enough to boost the EURUSD.
The US dollar posted its strongest weekly performance in a year and could extend its rally amid intensifying geopolitical risks in the Middle East. Political developments in Iran have increased uncertainty over the path of the conflict, boosting demand for the dollar as a safe haven. As a result, it opened the week with a gap lower.
Rapidly rising oil prices contributed to recessions in the U.S. economy in 1973, 1980, 1990 and 2008. And the current cooling of the U.S. labor market, fueled by the White House's tariff and anti-immigration policies, suggests a slowdown. In fact, in February, non-farm employment fell by 92,000 people and the unemployment rate rose to 4.4%. However, the United States is currently a net energy exporter. Its economy will be less affected by a rebound in WTI above $100 per barrel than Europe or Asia.
This is why the impact of rising oil and gas prices is reversing “US sell-off” flows. US stock indices have fallen less than their competitors and the dollar has risen. Speculators have reduced their net short positions in the USD by two-thirds over the past few days.
Even the increased chances of the ECB raising two rates this year above 30% are not enough to stop the euro from falling. Before the armed conflict in the Middle East, investors believed that the deposit rate would remain unchanged in 2026. They are now confident that it will increase from 2% to 2.25% and estimate the possibility of growth up to 2.5% amid a possible acceleration of inflation. However, when geopolitics reign, central banks take a backseat.
The ECB is unlikely to begin a monetary tightening cycle amid serious economic problems from energy disruptions and a rise in oil and gas prices. European reserves are depleted and the region is a net importer of energy, most of which comes from the Middle East. The EURUSD rightly appears to be one of the major currency pairs affected by the escalating conflict between the United States, Israel and Iran on Forex.
He FxPro Analyst team
