Hope for the Best, Prepare for the Worst. Investors have recently completely discarded fear and believe the conflict in the Middle East is coming to an end. Did the first negotiations between the US and Iran fail? No problem! New ones will follow. When neither side has any intention of returning to combat, signing a peace agreement is just a matter of time. But that time may stretch out.

The longer the war lasts, the higher the risk that Brent and WTI will remain at elevated levels. This is fraught with inflation acceleration and economic growth slowdown. The global economy is confidently heading towards stagflation. And the first evidence of this will be the release of data on European and American business activity for March.

Dynamics of Business Activity in Various Countries

What will central banks do? To combat high prices, they will raise rates. To keep the economies afloat, they will lower them. Central banks will face a difficult choice; however, the futures market predicts a mass tightening of monetary policy. Judging by Christopher Waller's comments, this will indeed happen. One of the FOMC's main "doves" stated that inflation risks are becoming more significant than unemployment risks. In this scenario, the Federal Reserve would prefer to keep borrowing costs high, even as the labor market continues to cool.

What is Allowed to Jupiter is Not Allowed to the Bull. If the US economy, as an energy exporter, can withstand both higher oil and gas prices and high rates, the eurozone clearly cannot afford this. The futures market is definitely overestimating the European Central Bank's ability to tighten monetary policy. Two to three acts of monetary restriction are too many. The currency bloc risks sliding into recession.

However, this may not be enough for a reversal of the upward trend in EUR/USD. Investors are driven by FOMO (fear of missing out) and buying stock indices and euros like hotcakes. They need something very frightening to deviate from the northern path. It is quite possible that this "something" will be a renewed breakdown of negotiations between the US and Iran or the resumption of bombings.

You Won't Be Nice by Force. Donald Trump is playing a dangerous game, threatening to destroy every power plant and every bridge. Iran may not come to the negotiating table under the barrel of a gun. It is not guaranteed that common ground can be found on the nuclear program. The parties' positions are very far apart. Achieving a compromise will be incredibly difficult. Only the de-escalation of the conflict will allow the euro to restore its upward trend against the US dollar. Conversely, worsening conditions in the Middle East will revive interest in the greenback.

Technically, on the daily chart of EUR/USD, there was a second consecutive gap at the opening of the week. The "bulls" closed it. However, the inability to maintain the main currency pair above 1.176 is a sign of buyer weakness and a reason for short positions.