Trump says Iran war "close to over" amid hopes for more negotiations
That US-Iran peace talks failed to deliver a sustainable ceasefire should perhaps not come as a surprise. And while a US naval blockade will push oil higher, that is a better outcome for the global economy than a renewed assault on energy infrastructure in the region. We doubt the dollar needs to rally too much further. Elsewhere, all eyes are on Hungary
USD: Dollar Need Not Rally Too Much
The DXY dollar index is up around 0.4% today after US-Iran peace talks failed to make any progress this weekend in Islamabad. Oil prices have understandably risen 7-8% on news from Washington that the US Navy would today start a blockade on shipping into and out of Iranian ports.
Reports had suggested that Iran was managing to export as much as one million barrels per day of oil during the crisis. Should the US Navy prove effective in curbing these exports, Asian customers will have to chase global oil supplies, resulting in higher energy prices. Presumably, Washington’s plan here is to deprive Iran of funds, while at the same time encouraging the likes of China and India to push Iran into a ceasefire.
Perhaps the reasons that energy prices are not higher and that equity markets are not lower today are that: a) at least the Iranian delegation showed up in Islamabad, and b) the alternative of a renewed destruction of energy infrastructure in the region – delivering lasting damage – has so far been avoided.
The focus now shifts to whether the naval blockade encourages another round of negotiations, whether the Iranian-backed Houthis in Yemen try to block the southern end of the Red Sea and what the likes of China make of interference in their oil imports.
Away from the geopolitical headlines that will bounce the dollar around this week, the market focus will likely be on central bank reaction functions. Spring IMF meetings taking place in Washington will deliver a plethora of central bank speeches. With oil prices remaining elevated and the jury still out on whether they will lead to second-round effects, expect central bankers to continue talking tough.
That could prove mildly dollar negative in that policymakers in Europe and Asia may be forced to talk tougher than the Federal Reserve. Here, the Fed will be mildly encouraged by Friday’s release of March CPI data, which largely showed the energy price shock being contained.
In terms of US macro data, this week’s calendar is very light, but we will be interested in Wednesday’s release of the TIC data for February. Recent releases here have shown softer foreign interest in US Treasury purchases.
Expect DXY to continue to be dragged around by energy prices, although we think good selling interest should emerge should DXY get near 99.50 – the top of a gap left last week when news of ceasefire talks first emerged.
EUR: Hungarian News Might Provide a Reprieve to the Euro
EUR/USD was hit in Asia as oil prices spiked after failed peace talks. As above, the fact that the combatants have not immediately resumed destroying energy infrastructure in the region suggests it could have been worse. That is why EUR/USD is not trading closer to 1.1600. Also limiting EUR/USD downside today are probably events in Hungary. The convincing pro-EU turn among the Hungarian electorate will be very welcome news for Brussels and may prompt a pause for thought among populist Euro-sceptic political parties across Europe. It will be interesting to see whether the Hungarian news delivers some independent euro strength today – e.g., in the likes of EUR/GBP and EUR/CHF.
Barring another major leg higher in energy prices today, we think something like 1.1700 looks a comfortable level for EUR/USD in the near term. The data calendar is light, but Luis de Guindos will be the first of many European Central Bank speakers this week. It looks too early for the ECB to completely rule out a rate hike in April (which looks unlikely), but we expect the pricing of a June ECB rate hike to hold up. 22bp is currently priced for that meeting.
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