Investors had barely time to understand why EUR/USD rose in response to the impressive U.S. employment statistics for September when a new uncertainty was added to the fate of the major currency pair. The armed conflict in Israel risks spilling beyond the country's borders and causing unforeseen consequences for financial markets. It's not surprising that the U.S. dollar strengthened at the beginning of the week, acting as a safe haven until October 13th. However, can it gain a new advantage in the medium term?
Employment dynamics outside the U.S. agricultural sector
Even though events in Israel have little impact on the oil market's dynamics, the increase in geopolitical risks in the Middle East has led to a surge in Brent prices. If the conflict escalates, which is quite likely, and other countries get involved, crude oil could rise even higher. According to Nomura, a rally in North Sea crude to $110 per barrel could lead to parity in the EUR/USD pair. Unlike the U.S., the eurozone is a net oil importer, and rising prices have a negative impact on its economy.
Simultaneously, the rally in Brent exacerbates the risks of a new inflationary surge in the United States. The Federal Reserve won't hesitate for long about raising the federal funds rate. With a strong economy, it's not difficult to do so, and the U.S. economy is indeed standing firm, unlike the European economy, which risks suffering from both a new energy crisis and Italy's profligacy. As a result, the euro may fall below parity for the third time in its history.
Dynamics of EUR/USD
However, there is an alternative scenario. Escalation of the geopolitical conflict in the Middle East could boost demand for safe-haven assets, primarily U.S. Treasury bonds. Investors will begin to buy them in unlimited quantities because the yields are quite attractive. As a result, the long-term upward pressure on U.S. dollar debt yields will sharply decline. Against this backdrop, EUR/USD could quickly soar. Perhaps the armed conflict in Israel is the very black swan we mentioned in previous materials.
It's still difficult to say which path the major currency pair will take, but its guiding star remains the yields of the U.S. debt market. Will investors buy bonds due to geopolitics, or will they be inspired by the continued slowdown in U.S. inflation in September? We won't have to wait long. Traders should be prepared for any scenario. The market is clearly moving away from the Fed's monetary policy and has a new toy. Why not take a closer look at it?
Technically, on the EUR/USD daily chart, the bulls managed to push quotes above the fair value of 1.0505. This is good news for buyers. However, the formation of an inside bar indicates uncertainty. If the trading day ends as it is, it makes sense to place pending orders at the levels of 1.0575 for buying and 1.0525 for selling.