EUR/USD: Bleeding temporarily halted on the euro, eyes are focused on Iran

Risk appetite remained close to zero mid-week due to the Israeli-American war in Iran, a conflict that has triggered retaliatory strikes by Tehran in many parts of the Persian Gulf. The Strait of Hormuz, effectively closed, is the focus of concern on trading floors, as it is the usual transit point for 20% of the world's crude oil and LNG. The price of WTI crude, currently above $77 a barrel, will weigh on global growth if this price stability persists.

And, inevitably, the question of a resurgence of inflation is on everyone's lips. This is especially true in Europe, where the latest consumer price index figures for February (before the start of the conflict) exceeded expectations, rising by 2.3% compared to 2.1%, excluding volatile items (food, energy, alcohol, and tobacco). In the US, recent figures on industrial activity (ISM), as well as resilience on the employment front, are being closely watched. In fact, the Department of Labor will release its highly anticipated NFP (Non-Farm Payrolls) report on the health of private-sector employment in the US at the end of the week. Currency traders will have some welcome benchmarks before then, such as the weekly jobless claims figures tomorrow.

"Despite the military superiority of the United States and Israel, the outcome of this war is highly uncertain, as is the path to its end. We know that all wars eventually end. But their duration and the damage they can cause are the essential criteria for measuring the consequences on the global economy and the markets," say strategists at LBPAM, taking a broader perspective.

The crux of the problem, therefore, indirectly lies in 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.

Oil and natural gas prices, highly volatile since the start of the conflict, will thus constitute a crucial working matrix for currency traders, insofar as downward pressure on prices tends to favor the dollar.

"The main structural risk lies in the Strait of Hormuz, a strategic chokepoint for global oil. Approximately 13 million barrels per day (about 33% of the world's seaborne crude oil) transit through this strait. Any significant disruption to these flows would likely lead to a major supply shock. Some tankers would alter their routes, while insurance premiums against war risks would increase, discouraging shipments," explains Wisdom Tree in a market note.

"It is important to note that a physical closure of the strait is not necessary to disrupt markets. Iran may not have the naval capability to completely block this waterway, but rising war insurance premiums can effectively constrain trade flows. If attacks against shipping increase, insurance costs could rise sharply, making transit prohibitively expensive. In such a scenario, oil prices would have to rise to offset the increased transportation costs, creating a vicious cycle of war premiums."

On the fifth day, 4 March, of the war in the Middle East, Iran continued to launch missiles against American and Israeli targets in the Gulf. Israel, for its part, targeted "dozens of targets" in Iran and launched "large-scale" strikes on Tehran while expanding its offensive into Lebanon, where loud explosions were heard in Beirut. Iran claims to have "total control" of the Strait of Hormuz.

Right now, the EUR/USD is trading at $1.1640.

KEY TECHNICAL ELEMENTS
Monday's sharp drop ended a period of consolidation above a 100-day moving average, which has now been decisively broken. The signal is negative ahead of the crucial test of the 200-day moving average (in brown). This underlying trend line was broken decisively on Tuesday, March 3rd.

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

We will maintain this neutral stance as long as the EUR/USD exchange rate remains between the support level at $1.1608 and the resistance level at $1.1636.