Middle East crisis can bring EUR/USD to parity
October 27, 2023 5:23 pmVideo
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In recent weeks, the markets have calmed down. They believed that central banks had managed to conquer inflation, and keeping their rates at elevated levels was necessary for hedging. Indeed, looking at how the American PCE has slowed down from 6.8% in July 2022 to 3-3.5% in July-September, you start to believe in better times. However, history not only repeats itself; it also rhymes. And this poses a serious danger for EUR/USD.
When inflation soared to multi-decade highs, the Fed got to work, rolling up its sleeves. Fed Chairman Jerome Powell was afraid of repeating the mistakes of his predecessors, who believed in victory over high prices too early, leading to a double recession. However, when PCE is losing steam as it is now, you inevitably start thinking about a soft landing. You deliberately hold rates instead of raising them. About 40 years ago, Paul Volcker was thinking the same way. In reality, inflation has drawn a new peak, and its trajectory currently astonishingly resembles the dynamics of those years.
Dynamics of U.S. Inflation
The situation is aggravated by the crisis in the Middle East. In the 1970s, the Yom Kippur War prompted OPEC to impose an embargo on Israel, driving up oil prices and hitting the global economy hard. If Iran and other countries are drawn into an armed conflict now, history will repeat itself. However, Europe will be the main victim. While getting rid of its dependence on Russia, the European Union signed contracts for LNG supplies with Qatar. Escalating geopolitical tensions will bring a new energy crisis to the Old World, hurting the economy of the currency bloc and causing EUR/USD to plummet towards parity and possibly revisiting the lows seen in September 2022.
For now, the euro is rising due to the implementation of the “buy the rumor, sell the fact” principle regarding third-quarter GDP and the U.S. dollar, as well as expectations of a neutral tone from the Fed at the October 31 – November 1 meeting and disappointing labor market statistics for October. The absence of intense military action in the Middle East is playing into the hands of EUR/USD bulls. However, Israel is not giving up its attempts to invade Gaza, which poses an increase in geopolitical risks and oil prices.
Considering that the United States has been a net energy exporter since 2019, their economy will endure. The same cannot be said for the Eurozone. It essentially sits on a powder keg, and Italian problems or GDP growth close to anemic levels will seem like minor issues compared to the potential escalation of an armed conflict in the Middle East.
Technically, a pin bar was formed on the daily chart of EUR/USD. Therefore, entering a long position on a breakout of 1.057 seems logical. However, bulls may encounter problems near the resistance levels at 1.0595, 1.0615, and 1.065. A rebound from these levels could signal a reversal, prompting the closure of long positions with subsequent euro sales against the U.S. dollar.
The material has been provided by InstaForex Company – www.instaforex.com
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