EUR/USD Weekly Forecast: Middle East war to take its toll on monetary polices
- War in the Middle East revived inflation-related concerns and is likely to force central banks to hike interest rates.
- European inflation ticked higher in February, market starts betting on ECB hikes.
- Dismal US employment data fueled risk-aversion and resulted in more US Dollar strength.
- EUR/USD is gaining bearish traction in the mid-term, with critical support at 1.1470.
The EUR/USD pair ends the week just below the 1.1600 mark, posting its largest weekly decline in over a year. Financial markets shifted to panic mode in March after United States (US) President Donald Trump joined forces with Israel and launched a massive attack on Iran on the last day of February.
War in the Middle East
Throughout the week, the Middle East crisis expanded and turned into an all-out war. Iran responded not only by targeting Israel, but also by hitting US military bases around the Persian Gulf, hitting both military and civilian objectives in neighbouring countries.
As an immediate consequence, Oil prices soared, with the barrel of West Texas Intermediate (WTI) crude surging roughly $20 and reaching levels not seen in almost two years. Demand for safety skyrocketed, and the US Dollar (USD) stands as the overall winner at the end of the week, posting its largest weekly gain in more than a year. On the contrary, the Euro (EUR) is among the worst performers.
But higher Oil prices and renewed USD strength are just the beginning. The long-lasting effects of the ongoing war in the Persian Gulf are enormous already even if, all of a sudden, the conflict ended today – something that won’t happen.
European inflation already heating up
Throughout the week, market participants learned that inflation in the Old Continent unexpectedly rose in February. Indeed, the fact that the preliminary estimate of the EU Harmonized Index of Consumer Prices (HICP) reached 1.9% YoY instead of the expected 1.7% does not seem worrisome at first sight. Neither the fact that the Producer Price Index (PPI) rose 0.7% on a monthly basis after declining by 0.3% in January. At the end of the day, both remain below the European Central Bank (ECB) goal of 2%. Not to mention, a revision of the Q4 Gross Domestic Product (GDP) showed annual growth at 1.2%, down from the previous estimate of 1.4%.
off the table Not only has inflation in the EU approached the ECB's goal, but with the ongoing Middle East conflict, it is likely to largely surpass it in the upcoming months. A 20% spike in energy prices is no joke. Europe relies on energy imports, and while the Union has planned ahead ever since the Russia-Ukraine war and has full storage ahead of the winter, EU demand will likely add to higher energy prices. Market players are already betting on rate hikes coming before the year's end. No more “good place” for President Christine Lagarde & co.
And what about US inflation and the Federal Reserve?
Higher inflation is not just an European problem. The US recently reported that the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve (Fed) favorite inflation gauge, hit 3% YoY. Additionally, the US labor market deteriorated sharply in February, according to the latest Nonfarm Payrolls (NFP) report.
The country lost 92K job positions in February,, a significant swing to the worse compared with the 126K jobs gained in January. Even further, the Unemployment Rate surged to 4.4% vs the 4.3% expected. Finally, annual wage inflation, as measured by the change in the Average Hourly Earnings, rose to 3.8% from 3.7%. The dismal report contributed to the already very dismal market mood, resulting in higher highs for the USD.
In this scenario, cutting interest rates as US President Trump desires is off the table. Speculative interest trimmed bets on three rate cuts this year.
Other than that, President Donald Trump indicated that there will be no deal with Iran except unconditional surrender, while suggesting he will be involved in electing the next Iranian leader.
What’s next
War-related headlines are likely to keep investors on their toes. Risk aversion won’t recede as there is no end in sight for the Middle East conflict, which continues to intensify.
Concerns may grow in the upcoming days, as both Germany and the US are expected to release inflation updates. The US February Consumer Price Index (CPI) is scheduled for Wednesday, previously at 2.4% YoY.
More relevantly, the US will publish the February PCE Price Index on Friday. If core inflation ticks above the previously reported 3.0%, markets will start betting on rate hikes in the US, an impossible scenario for the upcoming Fed Chair, Kevin Harsh. Still, bets on higher interest rates are expected to further fuel the USD rally.
EUR/USD technical outlook
In the daily chart, EUR/USD trades with a strong bearish bias as spot slips below all its moving averages. The 20-day Simple Moving Average (SMA) near 1.1800 gains downward traction above flattened 100- and 200-day SMAs clustered around 1.1700. This break from the prior consolidation above moving averages signals increased downside momentum, reinforced by the 14-day Momentum indicator holding below its midline and extending its decline. At the same time, the Relative Strength Index (RSI) indicator maintains its bearish slope in the 30 area, showing persistent bearish pressure without yet confirming deeply oversold conditions.
According to the weekly chart, EUR/USD is also at risk of falling further. The pair slid below the 20-week SMA around 1.17 while remaining well above the rising 100- and 200-week SMAs near 1.11 and 1.09, which still frame a broader uptrend. Still, the shorter moving average has lost its bullish strength, indicating the first stages of a sustained bearish trend. Meanwhile, the Momentum indicator is heading south near its midline, while the RSI indicator already crossed to negative territory, retaining its downward strength at around 40.
Immediate resistance emerges at the 20-week SMA near 1.1700, followed by the 20-day SMA around 1.18, with a recovery above this level needed to ease selling pressure and open a move toward the 1.19 area. The weekly low at 1.1530 comes as immediate support ahead of a strong static long-term support at 1.1470. A break below the latter should confirm a mid-term downward continuation, with the next level at risk being 1.1400.
(The technical analysis of this story was written with the help of an AI tool.)
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Author
Valeria Bednarik
FXStreet
Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.
