Markets jumped on Monday after US President Donald Trump announced on Saturday that a deal to reopen the Strait of Hormuz was “largely agreed”. However, since then, there has been a lot of conflicting information, which has led the market to retreat. The question for Forex traders is how likely currency markets are to reverse the recent moves.
The dollar was higher on Monday as Brent fell 7% from its Friday close. Gold prices were softer, however, a sign that the market wasn’t fully convinced that reopening the Strait was imminent. Markets moved to price in fewer ECB rate hikes, which helped firm up the Euro, as this would mean a smaller negative impact on the shared currency.
The Market Could Be Reversing
Those moves could be reversed as Iranian officials insist there is a large gap in negotiation positions between them and the US. US Secretary of State Marco Rubio seemed to imply that a deal would be concluded before the weekend ended and the Eid holiday began. Later on Sunday, the White House admitted that it would likely take days to reach an agreement.
The potential deal wasn’t an actual end to the hostilities; it was presented as a “Memorandum of Understanding” (MoU) that would pause the war for another 60 days. Crucially, during that time, both Iran and the US would allow unimpeded shipping through the Strait, and Iran would be able to sell its oil without restrictions. There was no official confirmation, but multiple outlets reported that these elements were in the agreement, and they are the most relevant to the markets.
The Crucial Point Remains Unresolved
US officials acknowledged there were a “couple” of elements that needed to be worked out, specifically around the pivotal issue of enriched uranium. Several outlets reported that Iranian officials had verbally agreed to send the uranium to a third country, but were unwilling to put that in writing. Hours after the reporting, numerous Iranian government officials appeared on domestic news networks saying that Iran was not stepping back from its nuclear ambitions.
Traders were apparently elated by rumours that Iran was willing to suspend its nuclear program, lending weight to the potential deal. However, it seems reports were premature, and the nuclear issue remains the primary sticking point in negotiations. In the meantime, however, the Strait remains closed, although an increasing number of ships are reported to have exited. However, large, easily targeted and slow massive crude carriers do not seem to be among them.
Where Will the Market Go?
Where this leaves the markets is that Brent is back above $100 per barrel after falling below $98 in the Asian session, and the dollar is firming up again. However, a better indicator of investor sentiment could be gold, which remained within its $4,500-4,525 range before the announcement. Traders are jumping on speculative assets like crude, but there hasn’t been a substantial move in investor sentiment that would shift gold prices.
Naturally, if a deal is actually announced soon, then the market could swing. But as it becomes increasingly apparent that there was more hope than substance in an agreement to reopen Hormuz, the market move could fade over the week. Attention now turns to whether Trump will resume attacks after the latest diplomatic effort failed.
