Oil and geopolitics weigh on the euro's outlook

On Monday morning, September 8, the EUR/USD pair is trading in a narrow range of 1.1619-1.1635 dollars. Despite fairly strong American data, the euro is still holding positions above 1.1600.

In the coming days, three factors are particularly important for the pair:

- the development of the conflict between the US and Iran;

- further dynamics of oil prices;

- expectations regarding ECB and Fed decisions.

If the situation in the Middle East continues to worsen, and Brent consolidates around 100 dollars or higher, pressure on the euro may increase. In this case, the dollar will receive simultaneous support as a safe-haven currency and due to a possible rise in inflation expectations in the US.

If tensions begin to ease, oil pulls back from current highs, and American statistics start showing signs of economic cooling, EUR/USD will have an opportunity to return to growth.

Thus, the short-term picture for the euro remains neutral-negative. Inflation in the eurozone and expectations of a tougher ECB policy provide some support to the European currency, but the strong American labor market, demand for the dollar as a safe-haven asset, and the sharp rise in oil prices are still creating serious obstacles for the euro.

The main source of uncertainty remains the Middle East: the development of the US-Iran conflict is currently capable of exerting a stronger influence on EUR/USD than individual macroeconomic publications. As Reuters reported yesterday, Iran stated that it will announce the creation of a new restricted zone in the Persian Gulf in the coming days. As we can see, the easing of tensions is still very, very far away…