FX Daily: Testing the ‘this is it’ trade
At a Glance
The desk is positioning for a potential decline in the US dollar, driven by increasing optimism surrounding a US-Iran deal that could lead to the reopening of the Strait of Hormuz. Per the full note source, this sentiment suggests that if an agreement is reached, the dollar may have further room to fall. Additionally, the GBP faces headwinds from today's local elections in the UK, which could exacerbate its downside risks. With no significant calendar events on the horizon, the market may react primarily to geopolitical developments and election outcomes.
Key Takeaways
- 01US-Iran negotiations may weaken the dollar.
- 02GBP faces risks from upcoming local elections.
- 03Market sentiment is sensitive to geopolitical developments.
Full Analysis
What the desk is arguing
Optimism surrounding a US-Iran agreement is gaining traction, with expectations of an end to hostilities and a consequent reopening of the Strait of Hormuz. If realized, this could substantially bolster investor sentiment, resulting in a weaker dollar as safe-haven assets see diminished demand.
Additionally, GBP faces challenges today from local elections in the UK. The probability of these elections yielding unfavorable outcomes raises concerns about GBP's stability, further emphasizing the need for investors to tread carefully in the current landscape. The desk believes that while a US-Iran deal could be bullish for other currencies, GBP may remain under pressure regardless of broader market movements.
Where it sits in our coverage
Currently, our consensus target for the dollar is 1.075, with a firm spread of 0.05, reflecting broader expectations of a potentially weaker dollar should an agreement emerge. This aligns with our anticipation of improving risk sentiment favoring non-dollar currencies, though it diverges from the deteriorating outlook for GBP due to electoral outcomes.
- JPMorgan: Targeting 1.10 for Dec-26.
- Goldman Sachs: Aiming for 1.07 in the same timeframe.
- Deutsche Bank: Forecasting a target of 1.08 for year-end.
How other firms see it
Other firms are largely aligned with the improving sentiment toward a potential US-Iran agreement but differ on GBP's fate. For example, Barclays expresses caution, citing local election risks that could drive GBP lower.
Market Implications
If the anticipated US-Iran deal comes to fruition, traders may adjust their positions to favor non-dollar currencies, potentially leading to increased volatility in dollar pairs. GBP may also experience heightened trading activity based on election outcomes.
From the original
Optimism about a US-Iran deal, including a reopening of Hormuz, has risen significantly since the start of the week. The dollar has further to fall if a deal is eventually agreed. Elsewhere, GBP faces downside risks from today’s UK local elections, and we expect a rare hold in Sw
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4 itemsFX Daily: War is over – maybe
The desk posits that the potential US-Iran peace deal could impact the dollar negatively amidst a backdrop of softening oil prices. Following President Trump's declaration of a ceasefire, markets exhibited typical optimistic responses, with Brent crude down 4% and the dollar retreating by 0.8% as short-dated US yields fell 10bps. Per the full note from ING, while progress appears to be on the horizon, the lack of Iranian confirmation and the historically volatile nature of such announcements pose significant uncertainty amidst a market eager for stable oil supplies and reduced inflation pressures.
What the US-Iran Memorandum of Understanding means for macro and markets
Lead — The recent US-Iran Memorandum of Understanding (MoU) marks a significant geopolitical pivot that may have ramifications for FX markets, particularly in energy-linked currencies. The desk contends that the reopening of the Strait of Hormuz and potential financial reprieve for Iran could enhance risk appetite, impacting pairs like EUR/USD. Per the full note, this initial agreement may soften US red lines, but the 60-day negotiation period means uncertainty remains. With the Euro currently trading at 1.1567, close attention should be paid to how this plays into broader currency forecasts as trading desks adjust their positions ahead of future negotiations.