At the start of the new trading week, EUR/USD regained some of the lost positions and fell to almost 1.05. Growing anti-risk sentiment as well as a sharp rise in oil prices helped the US dollar regain its footing after the knockdown delivered last Friday. Events in Israel echoed in financial markets. The safe-haven dollar has become one of the beneficiaries of the current situation. We should bear in mind that such fundamental factors are commonly unreliable. If diplomats get engaged in talks instead of using guns, the market will quickly switch to classical fundamental factors. Moreover, the current week is full of important macroeconomic data.
However, at the moment, everything indicates that the military will set the tone in the foreseeable future in the Middle East, not diplomats. Yesterday, the media, citing an unnamed senior Pentagon official, reported that the Israeli ground operation in the Gaza Strip would begin "in the next 72 hours." The Israeli Ambassador to the Russian Federation did not rule out this scenario. Besides, as the BBC notes, the Israeli military is now preparing for war on several fronts. According to them, such a scenario could become a reality if the powerful Lebanese group Hezbollah joins the fighting.
It is clear that the events in the Middle East add new risks to the global economic outlook. The conflict is already seriously affecting the Israeli economy. For example, the Israeli shekel has fallen by almost 2% to 3.914 per dollar (this is the lowest in the last 7 years). As analysts say, "it's just the beginning." The oil market, which has already reacted to recent events with a sharp increase, may again accelerate inflation, which has just begun to ebb away.
At the start of the week, oil prices rallied by more than 5%. Brent crude jumped to $88.5 per barrel. WTI oil rose above $87 per barrel. Anti-risk sentiment in the markets is also growing. At the time of writing this article, it is still night in the US, while European indices have already responded to the events taking place. For example, the Euro Stoxx 50 index opened in negative territory and has already dropped by 0.8% intraday. US stock futures fell by 0.5-0.6%. The US dollar initially advanced across the board, but it pulled back during the European session. The downward retracement comes amid reports that Lebanese authorities have received assurances from Hezbollah that it will not join the fighting between Israel and Hamas "unless Israel takes action against Lebanon." This news reduced the demand for the safe-haven dollar, but in case of a sharp decline in the main Wall Street indices, the greenback could again assert its strength, putting pressure on EUR/USD.
As we can see, the situation is highly volatile, and the information background is changing at a quicksilver speed, so we should not trust the intraday movements of the US dollar at the moment. As a rule, such geopolitical tensions have only a short-term impact on financial markets, so the same might happen this time. Everything will depend on the further actions of key geopolitical players influencing the current situation and on the further actions of Israel and Hamas directly.
For example, if the Israel Defense Forces actually launch a ground operation in the Gaza Strip, events will unfold according to an escalation scenario. In all other cases, the option of de-escalation is not excluded.
Unfortunately, today the situation in Israel is developing towards escalation. Apparently, anti-risk sentiment will dominate the markets in the near future. Let me remind you that this week, the US will publish key data on inflation growth such as a consumer price index and producer price index. The reports will be released on Thursday and Friday. So, we can say with confidence that the Middle East conflict will be topic No. 1 in the coming days. All other fundamental factors, including the Fed minutes, to be published on Wednesday, will take a backseat.
Geopolitical fundamental factors, as a rule, are "insidious and unreliable". By and large, they are unsuitable for planning any positions in the market. On the one hand, the balance is tipping towards further strengthening of the dollar, since there are no obvious prerequisites for de-escalating the situation at the moment.
On the other hand, the greenback's growth is based only on the overall anti-risk sentiment. If the mediation peacekeeping efforts of third countries bring any success, interest in risk will increase sharply, and, in turn, the US dollar will lose ground.
Therefore, it is now risky to consider both selling and buying EUR/USD. In the face of such uncertainty, it is advisable to maintain a wait-and-see attitude, at least in the short term. The situation is volatile. Over the next day or two, it will become clear exactly according to which scenario further events will develop. Here it makes sense to take a "step to the side" and stay away from the market.