Both the US and Iran acknowledged agreeing in principle to a 60-day extension of the ceasefire, with the formal signing expected on Friday in Switzerland. However, markets seem to be acting as if it’s the de facto end of the war. The main issue for markets, and forex in particular, is that the agreement will reopen the Strait of Hormuz by the weekend, allowing energy flows to resume.
While markets cheered the announcement, a few complications have arisen along the way. Notably, no official version of the agreement has been published, and both sides have issued statements that have different details about what might be in the plan. This could be a result of each side trying to sell the agreement to their respective country, but it could also signal that the deal will fall through before it can be signed. Markets are likely to remain cautious until it becomes official.
Gold, Dollar and Crude Moves
The market is already reacting, and the moves could continue as traders grow more confident that this is the real deal. Naturally crude is lower, with Brent falling over 5% at the market open, and WTI going below $80 for the first time since the conflict started in March. Gold is higher by $100 and moving upward, reversing its usual safe-haven status.
The dollar has weakened as markets expect a renormalisation of inflation in the coming months, making the US defensive play less attractive. On top of that, the odds of a rate hike by the end of the year are already declining, which contributes to weakness in the greenback. The FOMC will hold its policy meeting on Wednesday, adding risk to the dollar as investors are still unsure what to expect from the new direction under Chair Kevin Warsh.
Why the SpaceX IPO Is Important to Forex
Usually, specific corporate news is not a major issue for forex traders, but the historic SpaceX IPO on Friday does have some implications for the currency market under the circumstances. Traders were worried that the AI-based tech bubble was running out of steam, causing a pullback in tech stocks earlier in the month and hurting risk sentiment. The fear was that a massive IPO like SpaceX’s historic $75 billion would reduce liquidity and weigh on other tech stocks, dragging on risk sentiment.
However, tech stocks, and particularly those adjacent to SpaceX like Tesla, rose in the wake of the IPO. That indicates there is likely ample liquidity in the market, which allowed a general turn towards risk appetite that was further accelerated by news about the Strait of Hormuz. A more dovish Fed could further fuel risk appetite.
Where Does the Market Go From Here?
While there has been a bounce in risk sentiment that has weighed on the dollar and supported currencies at risk from the situation in Iran, like the Euro and AUD, there are some caveats. The deal hasn’t been signed, and the tech rebound could fizzle as traders consider the high valuations.
As a result, an actual peace deal hasn’t been fully priced in by the market just yet, so oil has further downside, and so does the greenback. Traders will likely be keeping an ear close to the ground to see if thee situation actually resolves, and that could lead to some extra volatility in markets this week.
