I refer to short-term movements with low volatility as ‘noise’. In the case of EUR/USD, volatility is considered low when the currency pair’s movements remain within a range of ±3% of a reference value. At the start of the year, the EUR/USD exchange rate was 1.1750. The USD briefly depreciated to 1.205 in January, rising briefly to 1.1400 amid the outbreak of war. This met the maximum range for ‘noise’.
The EUR/USD is currently trading within the narrow range of 1.1450 to 1.1600, indicating only minor fluctuations.
I emphasise these acoustic references because sounds do not necessarily have an underlying cause. They simply occur and have no consequences as long as they remain within the ranges outlined at the beginning. Fluctuations within this range are irrelevant to businesses’ needs. They have no significant impact.
The Increased Geopolitical Uncertainty Has Increased the Demand for Faster Adaptation
During a volatile period, it is important not to act hastily. Instead, you should pause and prepare for events that could cause the currency pair to move outside of its volatile but manageable range.
Amid all the noise in the media, it is impossible to predict what the most likely outcome of the war in Iran will be. Does the deployment of Marines signal an impending ground offensive, which would only make sense if the regime were to be overthrown and would therefore require significantly more troops than are currently stationed there?
Or is the U.S. preparing for an incomplete mission? The deployment is ongoing, but ground troops are primarily being sent to appease the ‘allies’ on the ground, who are likely to feel — and rightly so — that they have been abandoned.
If There Is a Market Rally, I Expect the USD to Rise Sharply
This would not be a sustainable long-term strategy, but rather a natural response to the war escalating and resulting in further destruction of infrastructure at Arab production facilities. This would further increase the world’s dependence on American production.
It is too early to set a definitive price target for the USD today. However, I think 1.1100 EUR/USD would be the minimum we could expect.
This would cause the EUR/USD to shift from a ‘noise’ range into a zone of significant market sentiment change, driven by compelling reasons. The result would be prolonged disruption to the supply of oil, gas, helium and aluminium. The economic recovery of the Arab states would grind to a halt for an extended period. Financing the years-long reconstruction effort could present a challenge to Saudi Arabia and other countries in the region, potentially leading to their dependence on U.S. banks.
The USD exchange rate could see significantly more movement than we have seen since the war began, when it rose from 1.18 to its current level of 1.1530. Given the scale of the war, this price movement is extremely small.
In the Case of TACO, the USD Will Start to Weaken Again
The war against Iran has already cost around $50 billion. This is money that the US does not have, yet it is clearly intent on creating the conditions to spend much more. The rise in long-term interest rates is significantly more painful for the US than for other countries where this is also happening. This is partly because U.S. debt relative to GDP is nearly twice as high as Germany’s, but also because U.S. interest rates are 30% higher than in Germany.
As the USD is likely to benefit from the prolonged weakness in oil and gas supplies, its downward trend is expected to resume. This will cause the USD to fall to between 1.25 and 1.30 EUR/USD by the end of the year.
