EUR/USD forecast: Crude oil weighs on stocks, currencies of energy importers

Thanks to the renewed upsurge in oil prices today, on the back of stalled negotiations between the US and Iran, we have seen the likes of the euro, pound, Indian rupee, as well as gold and major indices, retreat noticeably today. With the Strait of Hormuz remaining shut, oil shipment is restricted, which is helping to underpin oil prices and the US dollar, while undermining the euro and other currencies that are negatively correlated to oil volatility. Stagflation concerns are weighing on risk appetite more broadly today. The EUR/USD forecast will only improve from here in the event of a surprise deal.

 

Sentiment hit as oil extends gains, US CPI beats

 

Sentiment took a big hit this week and even the mighty US technology stocks fell as investors reacted to a combination of rising oil prices and a hotter-than-expected inflation report for April. European markets meanwhile had already been under pressure since the end of last week, as the renewed gains in energy prices raised concerns that inflation could remain sticky for longer, complicating the outlook for interest rates and economic growth, especially for global economies that rely heavily on oil imports.  Germany, the UK and India are clear examples.

 

 

Indian rupee at new lows

 

As mentioned, the Indian rupee fell again as oil pushed higher. The USD/INR hit new highs above 95.50 as the Indian rupee slid to a fresh record low. Here, high oil prices continue to rigger capital outflows, weighing on market sentiment there.

 

 

Beyond the Indian rupee, several other Asian currencies have also come under heavy pressure for the same reason.

 

And it is not just emerging FX. Pressure on the Japanese yen, for example, remains despite repeated interventions by Japan, while the likes of the euro and the pound have also been undermined, with the latter under additional pressure because of political uncertainty in the UK as pressure mounts over prime minister Keir Starmer to quit.

 

EUR/USD forecast remains under pressure

 

The EUR/USD failed to break above resistance near the 1.1800 handle yesterday, where it was once again met with resistance from the top of the triangle pattern.

 

 

With 1.1800 holding firm, this has raised the prospects of a deeper correction in the days ahead if we see some follow-through technical selling below support around the 1.1720 area, a level which was being tested at the time of writing.

 

Should 1.1720 break down in the next couple of hours or days, that could pave the way for further technical selling, initially towards the 1.1670/80 area, where prior support and resistance meets the 200-day moving average.

 

Beyond that, we have the 1.1600/5 level, marking the point of origin of the breakout from early April. Those are the immediate downside targets for the EUR/USD in the event of a breakdown.

 

However, things could turn even more bearish if those levels were to give way. In that case, we could see 1.1500 revisited, and possibly even lower levels beyond that.

 

Meanwhile, on the upside, the next resistance above 1.1800 is not seen until the 1.1900 and then 1.2000. But for the EUR/USD to climb towards those levels, we would probably need to see a proper de-escalation in the Middle East situation.

 

All about Strait of Hormuz

 

At the centre of all of this is the ongoing US-Iran standoff and the disruption surrounding the Strait of Hormuz.  WTI futures pushed well above the $100 per barrel mark, while Brent crude also rallied sharply to close in on $110. Those gains extended Monday’s advance after President Donald Trump described the ceasefire between the US and Iran as “unbelievably weak” and said it was effectively “on massive life support.”

 

Those comments came after Trump had rejected what he called an “unacceptable” counterproposal from Tehran aimed at ending the conflict.

 

Traders have started to abandon earlier optimism that this situation would be resolved quickly. As long as the Strait of Hormuz remains effectively shut, markets will continue pricing in the risk of tighter global oil supply — and that’s keeping strong upward pressure on crude prices.

 

And if oil continues climbing from here, expect even greater pressure on the EUR/USD forecast as well as equities and other risk assets.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R