American business, still adapting to restrictive trade policy, received another blow in the form of a sudden rise in energy prices.
Euro rate and the war in Iran
The conflict in the Middle East has become the main source of uncertainty, complicating recruitment processes, pricing strategy setting and capital investments.
Higher energy costs directly translate into higher transport costs, plastic and fertilizer production. As the Cleveland Fed central bank noted, producers and retailers are forced to raise prices to cover rising input costs, including previously amortized customs-related expenses.
Some companies have even introduced special subsidies for oil‑dependent products, directly hit by instability in the Persian Gulf.
As Kit Juckes, strategy director of Société Générale, emphasizes, "today's rally towards 1.18 offsets all declines since the outbreak of the U.S. and Israel war with Iran, based on optimism about the opening of the Strait of Hormuz."
"If a de‑escalation occurs, EUR/USD will easily break the 1.20 barrier riding a wave of positive sentiment," he added.
Chart. Euro to dollar rate (EUR/USD)
Source: Trading Economics
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Consumer shield starts to crack
Data collected up to April 6 clearly show how the closure of the Strait of Hormuz by Iran shook the market foundations.
The average gasoline price in the U.S. broke 4 USD per gallon, and diesel now costs over 5.60 USD per gallon.
For the average American this is a scenario that cannot be included in the household budget at current wages. The previous Fed report, full of optimism about inflation slowdown, was released before February 28, i.e., before the escalation of war actions.
Today consumer resilience, which surprised analysts after the pandemic, is starting to crack.
Fuel price hikes and basic grocery purchases are increasingly frustrating Americans whose household budgets are not prepared for additional burdens.
That in turn is a very dangerous combination for the current White House administration, as the midterm elections are rapidly approaching.
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Euro in play, what about the dollar?
In the foreign exchange market we can currently observe a loud discord between the narrative of the "end of the dollar" and the brutal economic reality.
The current approach below 1.18 is nothing more than a risky game of vabanque under a quick ceasefire in the Middle East and the reopening of the Strait of Hormuz.
However, it is worth keeping a cool head, because while the European Central Bank plans two hikes of 25 basis points in June and September, the Fed is for now only waiting, which theoretically supports the EUR.
The dollar to zloty rate reaches 3.60 PLN.
Chart. Dollar to zloty rate (USD/PLN)
Source: Trading Economics
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