26th May - "Largely Negotiated"

May 26
7 min read

Updated: May 27

Geopolitics

Over the weekend talks continued between the US and Iran, with Trump announcing that the deal was 'largely negotiated'. He also confirmed that the blockade on the Strait of Hormuz would remain in effect until an agreement is reached. The broad consensus is that the deal is expected to unfold in two stages, the first to agree to a ceasefire extension and to re-open the Strait, before the second stage to focus on other issues, with the nuclear issue first and foremost.

This is the clearest and most realistic route to a peace deal that we have seen so far, the two phase plan makes it more digestible for both sides and seems to give the deal a much higher chance of succeeding. The remaining sticking points are some of the hardest to negotiate so we are not without hurdles to overcome, but the developments over the weekend are the clearest yet that both sides are now working towards a realistic agreement.

Monday did provide a reality check, with the US confirming they had carried out a strike on southern Iran out of "self-defence". It had attacked missile launch sites and boats placing mines, the implication being that even during the ceasefire and negotiations Iran are still militarily active. The markets are treating this as a one-off incident, but it is worth flagging and monitoring as any further escalation could jeopardise the progress made so far.

The news and the potential re-opening of the Strait has pushed Oil comfortably lower, with both US and Brent oil now trading below $100. If this continues and oil continues to fall back towards previous levels, it will reduce inflation pressures across the world and be welcome news to the major central banks. We still have the issue of reduced global oil stockpiles, as it will take time for the Strait to re-open and oil to make its way around the world, oil prices are still likely to remain elevated for some time. The inflation issue will be reduced on news of a peace deal, but not removed entirely.

Forex

Since Friday morning we have seen a number of markets move on the news coming from the Middle East. The USD has drifted as a basket, with the DXY briefly falling below 99.000 overnight last night before recovering this morning on the news of strikes on Monday. The strikes have only offered minor support though, with the 'self-defence' narrative seemingly accepted by the markets as opposed to an escalation or renewed hostilities.

Should we receive more good news from Iran then the USD will continue to lose its safe-haven demand and fall further from its recent highs, whilst news of further strikes could damage the optimism we have seen and reverse the move lower. At this delicate stage of negotiations, it is most likely the most sensible idea to be patient and wait to see how the talks will progress before placing any longer term trades.

We saw the EUR/USD climb slightly on the weekend news, making back some gains lost this month. The oil price picture has also helped the energy dependent European bloc, which will be helped further if we see oil prices continue to fall. The GBP has also gained ground over the weekend, outperforming the EUR against the USD as well as the GBP basket as a whole. The healthy inflation figures from last week seemed to have shored up support for the UK economy, which has seen gilt yields fall significantly. As we have mentioned before, whilst a fall in yields would normally put downward pressure on a currency, in this case the fall is due to renewed support for the UK economy and so is lending support for the currency instead.

The JPY is an odd case this morning. The Japanese economy is particularly sensitive to oil from the middle east, but we have not really seen much support for the currency over the weekend despite the falls in oil prices. The likelihood is that the expectation for a deal in Iran has been partially priced in, whilst the market is hesitant as it waits for the BoJ to signal their next move. So far, the BoJ has only said that the timing of a rate hike is still being considered, as they monitor the current situation in the Middle East. Oil affects the economy by affecting inflation and causing a change in central bank's policies, if the BoJ has explicitly stated they are waiting to see before changing any plans, then the effect of oil prices will be muted until the central bank indicates a direction. As a result, we are still seeing the USD/JPY rising over the past week, even as oil is falling. We can continue to see this play out until the BoJ signals its intentions, which again puts the 160.000 level in play over the coming days. The question will be raised once again, will the BoJ have to intervene in the market, and if so how aggressive will it be?

In terms of the commodity currencies, CAD has continued to see a significant drop off as it continues to be affected by oil prices. It is continuing to be affected by the expectation of a deal and further oil price reductions, meaning it is being bid down more than may have been otherwise expected. It is likely to continue to do so for the foreseeable future unless we see a significant shift in the narrative surrounding the US-Iran peace talks.

AUD by comparison has gained some ground over the weekend, the interest rate differential remains a fundamental support for the AUD and has been further boosted by precious metals showing some signs of recovery. Should we see further good news from Iran, the AUD looks poised to benefit and continue its already strong 2026 so far.

Indices

We have now seen all time highs in all three major US indices on Friday, after the Dow broke through its previous high in February. It has since jumped above to fresh highs in futures trading yesterday, joining the S&P and Nasdaq in breaking new ground. The Nikkei has also broken fresh highs, whilst the FTSE100 is moving higher but still some way away from previous records.

The markets continue to be driven by optimism towards a deal being struck in the middle east and buoyed by strong tech stock performance. It is worth noting though, that the Dow has outperformed over the past few days, a significant point as it is the least tech-heavy of the 3 major indices in the USA. This could be a signal of a shift in funds moving from growth to value, moving away from tech companies that promise growth and income in future and towards companies that offer value and dividends now. The performance of the Dow against the S&P and Nasdaq is worth monitoring to see if this is temporary or a more permanent shift in capital.

There will be those who question how it is possible for the indices to be at all time highs when inflation is rising and an energy crisis affecting all markets. It may well be that the fundamentals point one way at certain points in time and we expect certain outcomes, but markets are affected by humans who do not always act rationally and in the direction you would expect. Euphoria and optimism are powerful drugs, it is always worth remembering that markets can stay irrational longer than you can stay solvent.

Precious Metals

Gold continues to hover around the $4500 mark, it closed below this on Tuesday last week but has since been trading above this mark, buoyed by the good news out of Iran. It has fallen slightly this morning on the news of the strikes by the US, and will continue to be acutely affected by the news from the Middle East as the week progresses. As has been repeated on this blog, the safe-haven demand for Gold that is normally a key market driver is being almost wholly outweighed by the rate-hike demand flows moving away from precious metals. As a result, until we see oil fall permanently, inflation figures fall and rate-hike narratives disappear in the US, we will continue to see Gold struggle to make any meaningful ground. Once the narrative changes, we can then expect to see Gold move back towards $5000 and higher as the year progresses.

Silver is following a similar path to Gold, falling as low as $73.80 before recovering back to $76-78 over the past few days. It will also be affected in the same way as Gold, albeit with more extreme moves as the higher-beta metal. Silver will also be supported by its use in electronics and cutting edge technologies, providing a fundamental and growing base of support in the long term. Once the Iran conflict is over, there is a very real chance we could see a significant long term boom in the price of Silver as its demand will continue to rise over the coming months and years.

This Week's Key Market Drivers

Iran & Oil Prices - We will continue to see Iran be the key market driver, as has been the case for months any news will be pored over, analysed and will meaningfully impact almost all markets.
UK Political Uncertainty - Any resolution to the uncertainty surrounding Keir Starmer's position will affect the UK market, if we see a resolution either way it is likely to remove some political uncertainty and help demand for the GBP.
FOMC Commentary - With Fed Chair Warsh now in place markets will be keen to hear his thoughts on the FOMC's future direction.
AUD CPI, Wed 2:30am UK time - This will be an indication on how the energy price shock is affecting the Australian economy and will affect the RBA's interest rate plans moving forward.
NZD Interest Rate Decision, Wed 3:00am UK time - The RBNZ is expected to hold rates, the more interesting development will be the commentary surrounding the decision.
USD Core PCE & Prelim GDP, Thu 1:30pm UK time - Both will give an indication into the US economy's performance amid the energy shock, with PCE in particular expected to be market mover if the figures are unexpected in either direction.