Crude oil and EUR/USD forecast: Deal or no deal?

 

Crude oil prices fell for the third day, albeit they were coming back sharply off earlier lows at the time of writing, while equity and FX markets were in a bit of holding pattern first thing today. Investors were sitting tightly as the US awaited Iran’s response to a proposed peace deal. If the deal is agreed, it could see the Strait of Hormuz re-open and ease the regional conflict. The resulting drop in oil should be a positive development for currencies of economic regions that rely on energy imports – such as the euro. The EUR/USD forecast could improve in that scenario. The pair was holding in the positive territory above 1.1750 area at the time of writing, maintaining a positive tone.

 

Will US and Iran strike a deal?

 

The latest developments surrounding Iran have kept investors focused firmly on the risk-on trade. Reports indicate Tehran is reviewing a US proposal that could eventually lead to the reopening of the Strait of Hormuz, while broader nuclear discussions may be delayed until later stages. At the same time, President Donald Trump has continued to strike a relatively optimistic tone, suggesting a deal could potentially be reached within a week ahead of the upcoming summit with Chinese President Xi Jinping on May 14-15.

 

 

That combination of easing geopolitical fears and hopes for diplomatic progress triggered a sharp sell-off in the US dollar yesterday and helped drive equities higher again across the world. Markets were in a holding pattern at the time of writing as traders assessed whether negotiations would actually produce a meaningful breakthrough.

 

Risk sentiment remains firmly positive

 

Financial markets continue to interpret the latest headlines as supportive for growth assets. The decline in crude oil prices over the past few days has acted as a major tailwind for global stocks, particularly for sectors sensitive to energy costs and inflation expectations. Although oil prices recovered somewhat from their lows yesterday following conflicting reports about the state of negotiations, the broader direction still points to easing fears over a major supply disruption.

 

For equities and the euro, that matters enormously. Lower energy prices help reinforce expectations that inflation pressures may continue to moderate, potentially giving the Federal Reserve greater flexibility later this year. It would also lessen the need for the ECB to tighten in a potentially stagflationary environment.

 

The euro’s underlying optimism has also been reinforced by relatively resilient economic data from the Eurozone. Recent PMI releases have not shown any major deterioration in activity that would suggest a recession is imminent.

 

So, markets are clearly pricing in a highly favourable outcome. Investors appear increasingly confident that geopolitical tensions will continue to ease without significant economic fallout. That leaves little room for disappointment should negotiations drag on or tensions flare up again.

 

Technical EUR/USD forecast: Bull flagging

 

 

Having reclaimed the 200-day average, the EUR/USD has been spending the last couple of weeks in consolidation between the 1.17 and 1.18 handles. More recently, price action has turned bullish within this consolidation phase, with price starting to point higher and now the pair is trying to break out of a bull flag pattern. If successful, it could then rally past the key 1.1800 resistance where it has encountered some selling pressure in recent days. Interim support comes in at 1.1750 ahead of 1.1715 next, with 1.1670 now being the line in the sand.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R