Fear strengthens the dollar

EUR/USD

Key zone: 1.1750 - 1.1850

Buy: 1.1850 (on strong positive fundamentals) ; target 1.2000-1.2050; StopLoss 1.1780

Sell: 1.1720 (on a confident breakout of the 1.1750 level) ; target 1.1600-1.1550; StopLoss 1.1780

The escalation of the conflict surrounding Iran has increased demand for safe-haven assets: capital preservation, rather than yield generation, has become the priority for investors. Against this backdrop, European currencies are losing attractiveness, while liquidity is flowing into the U.S. dollar, U.S. Treasuries, and gold. However, even these defensive instruments remain sensitive to further developments in the conflict.

Recall: on Friday, negotiations between the United States and Iran in Geneva ended without concrete results. The parties announced additional technical consultations that were expected to take place in Vienna; however, subsequent rhetoric from the U.S. administration indicates a reduced emphasis on a diplomatic resolution.

Amid a global risk-off shift, the dollar is once again reinforcing its status as a key safe-haven asset. Additional support came from firm presidential statements regarding military backing for allies and the sufficiency of resources to continue the operation for several weeks. Such signals strengthen expectations of prolonged instability.

• In the event of a rapid return to negotiations, the euro and the pound may recover lost ground.
• In the case of a protracted and expanding conflict, demand for the dollar will intensify amid rising oil prices and accelerating inflationary pressure in the United States.

At present, the second scenario appears more likely. The U.S. President called on Iranian armed forces to lay down their weapons in exchange for security guarantees and expressed a desire for a change in the country’s political leadership, mentioning the existence of candidates for future leadership positions. Iran rejected these proposals and increased military activity in the region, including strikes on Israel and other Middle Eastern countries.

There is a risk that the conflict could transform into a prolonged confrontation with expansion across the entire Persian Gulf region.

An additional factor supporting the dollar is the rise in oil prices, which is generating inflationary pressure. Higher energy costs trigger the classic cost pass-through mechanism, whereby the initial increase is recorded in the producer price index, and the full effect is reflected in consumer prices within three to six months.

Under such conditions, the U.S. Federal Reserve is likely to maintain a cautious stance not only at upcoming meetings but also over a longer-term horizon. The continuation of the conflict significantly reduces the probability of an interest rate cut in June, providing additional support to the dollar.

In Europe, the macroeconomic situation remains weak.

• Industrial activity continues to decline, while inflation is slowing, limiting the scope for policy tightening by the European Central Bank and increasing pressure on the euro.
• The European Commission stated that it does not observe an immediate threat to oil and gas supplies; however, price dynamics indicate rising market risks.
• Brent crude has already risen to $79–82 per barrel, representing an increase of 10–13% since the market open. According to estimates by Barclays and Citibank, in the event of further escalation or a blockade of the Strait of Hormuz, prices could reach $100–120.
• Higher fuel costs will lead to increased logistics expenses, air transportation costs, and production expenditures.
• From a geopolitical standpoint, such a backdrop supports the dollar at least in the short term, as long as a high level of uncertainty persists.

And what is the result?

The U.S. currency is receiving dual support: from resilient U.S. economic indicators and the Federal Reserve’s cautious policy stance, as well as from its status as the primary safe-haven asset amid rising geopolitical risks and accelerating inflation expectations.

So we act wisely and avoid unnecessary risks.

Profits to y’all!