Fear of inflation is stronger than fear of war

EUR/USD

Key zone: 1.1400 - 1.1500

Buy: 1.1520 (on strong positive fundamentals) ; target 1.1650; StopLoss 1.1450

Sell: 1.1380 (upon a decisive break above the 1.1400 level) ; target 1.1250-1.1200; StopLoss 1.1450

The situation around the Strait of Hormuz has noticeably worsened after a U.S. strike on the Iranian island of Kharg Island. According to available data, not a single vessel passed through the strait for three days.

Paradoxically, the calculation of the administration of Donald Trump was different. It was assumed that the destruction of military facilities on the island and the threat of further strikes against oil infrastructure would force Iran to unblock the strategic maritime route. However, this did not happen.

If strikes on Kharg Island continue and the oil infrastructure is destroyed, the global market may lose a significant portion of oil supplies passing through the Strait of Hormuz. This route ensures the transportation of nearly 20% of global oil exports, not counting numerous oil storage facilities in the region.

Any of these scenarios could push oil into a price range of around $200 per barrel.

After the failure to unblock the strait, Trump stated that China should help resolve the shipping problem, threatening to cancel the planned summit with Xi Jinping, scheduled to take place from March 31 to April 2. However, such diplomatic tactics could work against U.S. interests.

The president also proposed involving forces of NATO to patrol and ensure security in the Strait of Hormuz. So far, the alliance has not officially commented on this initiative, and sharp statements by Emmanuel Macron have not changed the overall uncertainty.

However, a potential shortage of energy resources is only part of the problem. A far more serious risk is the possible return of global inflation.

Concerns about rising prices are already limiting expectations of interest-rate cuts in the world’s largest economies this year. The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada and other central banks are ready for the first time since COVID-19 to provide an official assessment of inflation risks related to the conflict around Iran.

Four years ago inflationary pressure intensified amid the recovery of the global economy after lockdowns, accumulated household savings, and disrupted supply chains. In 2022 monetary policy remained stimulative, and interest rates in many countries were low or even negative.

Today the situation is different: monetary policy in many economies remains neutral or restrictive, and budget deficits have significantly decreased.

Nevertheless, inflation expectations among the population remain elevated. Households still feel the consequences of price increases in recent years. In the European Union and the United Kingdom consumer prices have increased by about 20% compared with the end of 2021.

According to Financial Times, prices for food and non-alcoholic beverages have increased by more than 30% in the EU and the United Kingdom and by about 18% in the United States.

At the same time, the current economic situation differs significantly from the conditions that led to double-digit inflation in 2021–2022 after the pandemic and the start of the Russian invasion of Ukraine. The labor market is weaker, monetary policy is tighter, and inflation in most countries has been declining for about three years.

• Analysts in the banking sector have again begun raising inflation forecasts while simultaneously lowering expectations for economic growth.
• A survey conducted by Consensus Economics showed that experts revised inflation forecasts for 2026 for the G7 countries and Western Europe. Inflation in the eurozone is now expected to average about 2.1%, slightly above the target level of the ECB.
• The inflation forecast for the United Kingdom for 2026 has been raised to 2.6% from the previous estimate of 2.5%.
• In the United States, consumer prices are expected to increase by about 2.7%, which is 0.1 percentage points higher than the February forecast.

Financial markets are already reassessing the future path of monetary policy. Traders are pricing in the probability of at least one rate increase by the European Central Bank before the end of the year and allow the possibility of a similar step by the Bank of England.

Even before the strikes by the United States and Israel on Iran began, the market expected two rate cuts by the Bank of England from the level of 3.75%, while the policy of the European Central Bank was expected to remain unchanged.

During the current week, the Federal Reserve, European Central Bank, Bank of England and Bank of Canada are expected by analysts to keep the parameters of monetary policy unchanged.

However, oil near $100 per barrel, a sharp rise in gas prices in Europe and Asia, as well as potential disruptions in the fertilizer market have already led investors to revise expectations regarding interest rates by the end of the year.

So we act wisely and avoid unnecessary risks.

Profits to y’all!