EUR/USD: Geopolitical events are boosting the USD

In a tense atmosphere due to the war in the Middle East, risk appetite contracted further, causing the EUR to continue its decline against a USD bolstered by soaring crude oil prices. WTI (West Texas Intermediate) crude surpassed $75 amid supply disruptions and a lack of visibility regarding the reopening of the Strait of Hormuz. It's worth noting that it was trading below $55 in mid-December. Brent crude, the North Sea benchmark, is nearing $80 a barrel.

As a reminder, the United States and Israel launched Operation Epic Fury against Iran on Friday night, culminating in the assassination of Iranian Supreme Leader Ali Khamenei on Saturday. Iran, for its part, has launched a series of strikes against its Gulf neighbors in response to the US-Israeli raids.

"The key question for the global economy remains whether the Strait of Hormuz could effectively be closed to oil and gas exports for more than a few weeks. A prolonged disruption would harm global growth and significantly increase inflation. For example, a sustained rise in the price of oil of $15 per barrel could increase the level of consumer prices in the United States by nearly 0.5% and consequently reduce disposable income gains," warns Martin van Vliet, Fixed Income Strategist at Robeco.

"The situation remains highly volatile and the duration of the conflict is uncertain, with potential risks to energy supplies, maritime freight in the Strait of Hormuz, air transport, and tourism," explains Deutsche Bank in a market commentary published this Monday morning. The Strait of Hormuz is a bottleneck for oil transport in the Middle East, through which approximately 20% of the world's oil supply passes, notes Janus Henderson.

The central question, therefore, indirectly concerns the duration of the conflict, estimated at four weeks by the notoriously imprecise and unpredictable occupant of the White House. The disruption to crude oil supply, at least in the short term, is directly correlated to this number of weeks, which trading floors are finding extremely difficult to estimate. This is causing significant volatility in crude oil prices, admittedly somewhat less so in the VIX.

"As long as oil supplies continue, this is a volatile and non-systemic event, but it confirms that geopolitics is now structurally integrated into the investment cycle. In the short term, this fuels inflation risk, the strength of the US dollar, and the dispersion of asset classes. Energy volatility, inflationary uncertainty, and regional dispersion are once again becoming defining characteristics of the market," explains Monica Defend, Director of the Amundi Investment Institute.

On the statistical front, the ISM manufacturing index exceeded expectations, reaching 52.3. This further pushes back the timeline for another round of monetary easing by the Fed. It's worth noting that the very first inflation estimates for the Eurozone, at 2.3% annually for February, also exceeded expectations (2.1%), excluding volatile items.

Right now, the EUR/USD is trading at $1.1594.

KEY TECHNICAL ELEMENTS
Monday's sharp drop ended a period of consolidation above a moving average (the "100-day" average) which has just broken decisively. The signal is negative ahead of the crucial test of the 200-day moving average.

MEDIUM-TERM FORECAST
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is negative.

Our entry point is at $1.1602. The price target for our bearish scenario is $1.1341. To protect your capital, we advise placing a stop-loss order at $1.1701.

The expected profit for this forex strategy is 261 pips, and the potential loss is 99 pips.