What is the scenario of the conflict in the Middle East? Like in the summer of 2025, when the US and Israeli attacks on Iran lasted 12 days? Or like the confrontation between Russia and Ukraine, which has not been able to end for more than four years? The markets are starting to put the second scenario in the quotes of their instruments. However, rumors about Tehran’s willingness to negotiate forced investors to switch to the former, and the EURUSD recorded its best daily rally in a month.
Hope for the best, prepare for the worst. Donald Trump does not rule out the Venezuelan scenario, when, after the abduction of Nicolas Maduro, the authorities began to cooperate with the United States. However, the assassination of Iran’s leaders and the ongoing bombing have the goal of regime change by military means. It is longer-lasting and assumes a continuation of the oil rally, an acceleration of global inflation and a slowdown in economic growth. The same option as in 2022. Then, from the beginning of the armed conflict in Ukraine to the end of the year, the USD index increased by 6%.
Markets believe in the best. They are still hoping for two acts of monetary expansion by the Fed by the end of 2026, even though they have shifted expectations for the resumption of the cycle from June to July. Such a trajectory of the federal funds rate will mean that the fire in the Middle East will be extinguished. Vanguard is counting on the worst. According to the asset manager, the Fed will loosen monetary policy only once. The US labor market is stable, and the economy is able to accelerate under the influence of a Large and beautiful tax reduction law. If so, then the EURUSD still has a lot to fall.
Indeed, ADP’s employment growth in the private sector in February by 60 thousand, the best since July, confirms Vanguard’s opinion. The fact that the Supreme Court has begun demanding that the White House refund tariffs on $130 billion is rather a positive thing for the US economy. Most of the fees fell on the shoulders of Americans, and returning money to them was like a new fiscal stimulus.
The fact that the US economy is in order is also indicated by the growth of business activity in the service sector that exceeded forecasts in February. Amid concerns about Europe’s clean energy buyer, we can talk about the return of American exceptionalism. Previously, she faithfully served Greenback.
Of course, excesses, such as the New York Times story about Iran’s willingness to negotiate, happen. But as long as the conflict remains the base case for 4-5 weeks, the US dollar risks strengthening even more.
