The Middle East has forced us to seek refuge, which the US dollar has not been for some time. As a result, rising oil prices against the background of a joint operation by the United States and Israel against Iran paradoxically leads to a strengthening of the currencies of net importers of black gold. However, the markets shoot first and then sort it out, so the initial reaction of the EURUSD to the surge in geopolitical tensions may actually be false.
According to the head of the Bundesbank, Joachim Nagel, doubts about the US dollar’s safe haven functions have increased recently. As a result, the greenback risks weakening even more amid a loss of confidence from international investors. Indeed, because of the conflict in the Middle East, it was not the “American” that was popular, but gold, the Swiss franc and the treasury.
Markets are used to the fact that geopolitical shocks do not last long. Therefore, as soon as information appeared that some Iranian officials were ready to negotiate with the United States, oil stopped growing, and safe haven assets took a step back.
However, Barclays warns that this time things may be different. According to Donald Trump, the conflict will last 3-4 weeks. Until Tehran capitulates. Or until he appoints a country leader loyal to the United States. Therefore, Barclays believes that only a drawdown of American stocks by 10% or more will allow you to start buying the dip. It’s too early to do that yet.
The longer the conflict lasts, the more investors will start thinking about its consequences for the global economy. Exporting countries, including the United States, should benefit from rising oil prices. On the contrary, the eurozone and Japan will be the main losers due to the events in the Middle East. On the other hand, Donald Trump is unlikely to want to prolong the confrontation, as in this case, American inflation risks accelerating.
While the markets are weighing the pros and cons, the key event of the economic calendar is looming on the horizon – the US employment report for February. Investors are asking themselves whether the January surge in non-farm payrolls was a temporary phenomenon. Or has the labor market recovered after all? In any case, the bar for the Fed to cut the federal funds rate soon remains high. This fact supports the US dollar.
