When the United States bombed Iran, time was working against it. The campaign was costly and inefficient, while rising gasoline prices were dragging down Republican approval ratings. However, the U.S. move to block the Strait of Hormuz changed everything. Time is now on Washington’s side. Tehran is running out of oil storage capacity, and transporting crude to China by rail is hardly a viable solution. Donald Trump has effectively pushed his opponent toward peace proposals, allowing EUR/USD to take two steps forward and one step back.
In essence, the Middle East conflict has turned into a survival race. What will break first—the global economy or Iran’s economy? The former tends to be more resilient to shocks than initially expected. One only needs to recall how the eurozone and other regions withstood Donald Trump’s tariff pressures. As long as oil and gas prices are not at record highs, global GDP can absorb the strain. But can Iran’s economy withstand a U.S. blockade of the Strait of Hormuz?
Judging by Tehran’s latest proposals, cracks are already appearing. When there is nowhere to store oil and cutting production is undesirable, the only option is to backtrack. For now, Washington is rejecting these proposals, arguing that Iran still intends to retain control over the Strait. At the same time, a combination of investor optimism—that a ceasefire will lead to lasting peace rather than renewed hostilities—and disruptions in oil supply is fueling a simultaneous rally in the S&P 500 and Brent crude. EUR/USD is forced to choose: rise on weakening demand for the U.S. dollar as a safe-haven asset, or fall due to the risks of an energy crisis in the eurozone.
At first glance, central banks seem to be making life easier for the euro. With inflation likely to accelerate due to elevated oil prices, most are expected to raise interest rates. The Federal Reserve, by contrast, is expected to hold rates steady, with only a limited chance of cuts. In theory, this divergence in monetary policy should support EUR/USD.
The problem is that tightening monetary policy under current conditions amounts to little more than sawing off the branch you’re sitting on. The economy is already under strain, and higher rates only make things worse. It is no surprise that the European Central Bank’s current rhetoric is increasingly being viewed by the market as “hawkish” bluffing. It is unlikely to begin a tightening cycle in April—and even June is far from certain.
