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: Remarkable resilience of risk assets
The desk interprets the recent uptick in risk asset purchases and dollar selling as a response to perceived progress in US-Iran negotiations, indicating a shift in investor sentiment. Per the full note [source], this development contrasts sharply with earlier fears of a potential oil market tipping point that could lead to a significant spike in crude prices. With no major economic events on the horizon, the focus remains on how these geopolitical dynamics will influence currency movements, particularly the USD's potential downside. The consensus among firms suggests a cautious outlook, with targets reflecting a range of expectations for the USD's trajectory.
What’s next for the USD after the ceasefire in the Middle East?
The desk anticipates continued weakness for the USD following the recent ceasefire agreement between the US and Iran, as highlighted by MUFG EMEA's analysis. This development has already led to a significant reversal in the dollar's strength, with the dollar index dropping from a 3% gain to just over 1% since the conflict's escalation. The desk notes that the easing of military tensions has diminished safe-haven demand for the dollar, while diverging monetary policy signals from the Fed and other central banks further exacerbate this trend. Per the full note [source], the Fed's reluctance to raise rates in the face of rising inflation contrasts sharply with the ECB's more hawkish stance, which is expected to lead to further dollar depreciation.
Oil Eases, Dollars React: What the Strait of Hormuz Reopening Means for Markets
The desk believes that the reopening of the Strait of Hormuz will lead to a depreciation of the US dollar as market sentiment shifts positively towards energy supply stability. Per the full note from MUFG EMEA, the initial dollar response has been negative, reflecting optimism about a short-lived energy supply crunch and underlying economic fundamentals that remain weak. This sentiment aligns with our consensus target for EUR/USD at 1.075, suggesting a potential upward trajectory for the euro against the dollar as geopolitical tensions ease.
The Commodities Feed: Oil trades lower as US-Iran deal noise grows
The desk views the increasing noise around a potential US-Iran deal as a significant factor pushing oil prices lower, reflective of broader market conditions. Per the full note from ing-think, signs of diplomatic progress have contributed to bearish sentiment in the oil market which can imply a shift in supply dynamics. This could have downstream effects on FX pairs sensitive to commodity movements, particularly those intertwined with energy exports and imports. The evolving geopolitical landscape and its implications for oil supply should be monitored closely as they could impact currency valuations in the near future.
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