FX.co ★ EUR/USD. The Hormuz Trap: Dollar Strengthens Amid Geopolitical Turbulence

The EUR/USD pair closed Friday's trading at 1.1417—the lowest level since July of last year. The pair has now been declining for two consecutive weeks throughout March. While at the end of February traders were attempting to establish themselves above the 1.1810 level, the focus now is on the 13 figure. It seems this is far from the limit of "bearish potential"; if the conflict in the Middle East drags on and expands, we may soon see the 10-figure mark on the horizon. Unfortunately, the escalation scenario remains the base case and the most likely outcome. As of today, there are no clear and reassuring signs of de-escalation, indicating an imminent end to the war. This means that the safe-haven dollar will continue to strengthen, exerting a corresponding influence on the major currency pairs.

Last week showed that Trump has not achieved a blitzkrieg in Iran. The conflict has entered a prolonged, sticky phase with unpredictable consequences. Despite initial U.S. and Israeli claims in the early days of the operation that they had air superiority and destroyed much of Iran's air defense, Tehran still retains the capability for retaliation. Each day, it uses this strength to strike American bases in the region and oil infrastructure in neighboring countries.

The main outcome of the week was that Tehran has effectively paralyzed shipping in the Strait of Hormuz, resulting in a sharp spike in energy prices. This factor has become a key driver of the dollar's strengthening. Consequently, the unblocking of this vital transportation artery will provoke a market reaction—the interest in riskier assets will increase, while the safe-haven greenback will come under significant pressure.

This raises a logical question: What are the chances of unblocking the strait in the foreseeable future? In my view, the answer to this question directly depends on the willingness of the U.S. and Iran to come to the negotiating table. Forced unblocking of the strait is unlikely to work and will not restore pre-war traffic levels. Essentially, Iran does not need military ships to control the strait; mobile missile launchers and swarms of attack drones positioned along the coastline pose a threat to shipping. Even if the United States destroys 90-95% of these, the remaining 5-10% will make insuring tankers impossible.

All other ideas to solve this issue also seem unfeasible. For example, Donald Trump proposed a $20 billion government reinsurance program for tankers. However, it later became clear that American companies are hardly involved in such specialized insurance. The main player is the British company Lloyd's of London. Its representatives have recently faced refusals from major operators such as Maersk and MSC.

Another potential solution to the problem is a military escort for the tankers. However, this option comes with several downsides. First, the United States has not yet demonstrated the necessary political will. The issue is still being discussed within the halls of the White House and the Pentagon. Second, insurers oppose this idea, as a military convoy is not only a protection but also a target for Iranian forces. Representatives of major insurance companies reasonably point out that the presence of a hypothetical destroyer next to a civilian tanker makes the latter a priority target.

The problem has become seemingly unsolvable, which is driving the oil market back into momentum. The measures taken have not helped; oil prices (Brent, WTI) stubbornly remain above $100, despite the partial lifting of American sanctions on Russia and the release of strategic reserves by G7 countries.

In other words, direct negotiations between the U.S. and Iran are necessary to resolve this issue and restore shipping in the Strait of Hormuz. Alternatively, the rise to power of opposition forces in Iran that are loyal to the White House could be a solution. However, this second scenario seems highly unlikely: the Iranian opposition lacks a unified leader within the country, and the current power structure has remained intact despite the elimination of the Supreme Leader and other high-ranking politicians.

Thus, essentially, the only option for real de-escalation remains negotiations. However, as of today, both sides are presenting maximalist demands that appear inherently unattainable. For example, Trump has shifted from a rhetoric of "containment" to demanding unconditional surrender. Meanwhile, the official representative of the Iranian authorities has outlined Iran's conditions for ending the war: reparations from the U.S. for damages incurred and the withdrawal of all American bases from the Persian Gulf.

All of this indicates that military actions in the Middle East are unlikely to cease in the coming days or weeks. According to sources from The Wall Street Journal, the war in the region will last "at least a few more weeks," as Trump insists on continuing strikes against Iranian military forces and their proxy groups.

This means that the Strait of Hormuz will remain closed, the oil market will continue to rise, and the dollar will maintain increased demand as a safe-haven asset.

In this context, it is advisable to use corrective pullbacks in the EUR/USD pair to open short positions, with targets set at 1.1410 and 1.1350.