Markets, like life, are made up of mistakes. Donald Trump is mistaken when he claims a total victory for the United States, although Iran continues to control the Strait of Hormuz. Investors clearly overestimated the ability of central banks to tighten monetary policy due to the crisis in the Middle East. Now they have increased the chances of a federal funds rate cut too quickly. This allowed the EURUSD to rise sharply, but then an epiphany came.
In fact, the only reason why the Fed could return to monetary expansion is due to the prolongation of the conflict in the Middle East. We are talking about the recession in the United States caused by the oil crisis. If peace comes after a two-week cease-fire and negotiations, Brent will still not sink too low. This means that the risks of accelerating inflation will grow. And with them, the Fed’s desire to keep rates at the same level. The markets are wrong, and this is one of the hidden trump cards of the US dollar.
The second is the transition from TACO to FOMO. Since the beginning of April, the EURUSD bulls have been waiting in the wings. They were counting on negotiations and were preparing for Trump to always back down. This strategy has triggered 9 of the 10 largest gains in the S&P 500 since the Republican took office. Owning shares on these days alone, due to subsequent FOMO or fear of missing out, would bring an investor 52%, compared with 12% for a buy-and-hold strategy.
The problem is that the momentum from TACO is draining fast. And the two-day rise of the EURUSD on the news of the truce between the United States and Iran proves this. There is a gap between the opponents. Donald Trump calls the victory total, although the enemy retains about half of the military arsenal and continues to control the Strait of Hormuz. He allowed a dozen tankers to pass through it during the two-week cease-fire and does not tire of charging fees. Apparently, the American president is counting on some of this money. Will he get it? Not a fact.
More importantly for the market, oil sold off too quickly, found support and is likely to remain at elevated levels for a long time. In this scenario, consumer prices in the United States will accelerate, followed by core inflation. This will force the Fed to keep the federal funds rate at current high levels. The markets are mistaken, which, coupled with the depletion of the upward momentum in the euro against the background of the TACO sale, increases the risks of consolidation of the main currency pair.
