Everything belongs to the winner. Donald Trump believes that the United States should charge duties for the passage of the Strait of Hormuz by tankers. They won the war. However, so far Iran has been doing this, allowing transit to Iraq and other countries for money. Tehran rejected the mediators’ proposal to cease fire for 45 days, which brought down the EURUSD quotes after their slight increase.
The clock is ticking. The deadline for Donald Trump’s ultimatum expires on Tuesday, but there is hope that it will be postponed again. Bombing Iran’s energy infrastructure will raise oil and gas prices even higher and inflate inflation in the United States. This contradicts the pre-election promises of the owner of the White House and increases the risks of Republican defeat in the midterm elections.
Indeed, the first signs of stagflation are already beginning to appear. The price index of purchasing managers in the service sector jumped in March at the fastest pace in 14 years, and the employment situation worsened. This led to a slowdown in business activity, a leading economic indicator.
Stagflation is an extremely unpleasant state of the economy for the Fed. It is customary to deal with high prices by raising the rate, and with a potential recession by reducing it. The central bank is about to find itself in a position between two fires, and the futures market predicts that it will make a choice in favor of keeping the cost of borrowing at the same level. The chances of monetary expansion are fading like a morning mist, which supports the US dollar.
The dominance of the greenback in Forex may seem strange, because in the case of the European central banks, derivatives expect much bigger changes. According to their forecasts, the ECB deposit rate will rise by 75 bps, the Bank of England’s REPO rate by 50 bps, although before the conflict in the Middle East, the futures market did not expect anything from Frankfurt, and two acts of monetary expansion from London.
However, the fight against oil by tightening monetary policy looks like a clear mistake. Central banks are able to effectively deal with excessive demand, just like after a pandemic. The current crisis in the black gold market is a shortage of supply. Raising rates in such conditions is another nail in the coffin of our own economy.
The Fed’s passive position looks much more rational, and the American economy is more resilient to the energy crisis. Coupled with the growing demand for safe haven assets due to the potential escalation of the geopolitical conflict, this dictates the need to continue buying the US dollar.
