24th April - Standoff

Forex

There was no diplomatic breakthrough in the Middle East yesterday, with both sides becoming more entrenched in their positions as time goes on. Trump restated there is no deadline on the ceasefire extension, which removes time pressure but also removes any incentive to move quickly.

The day saw the USD gain some ground on the back of the uncertainty, as well as due to the rise in oil prices for the third consecutive day. The dollar was also boosted by strong manufacturing PMIs and the continued effects of Kevin Warsh's hawkish comments a few days ago. The probability for FOMC rate cuts continued to slide, possibly signaling the stronger dollar could be a sign we are slowly reverting back to traditional market drivers rather than solely reacting to geopolitical news. However, any significant development in Iran could overshadow any fundamental data in minutes, so the focus still remains towards the agreement to and then outcome of peace talks.

The JPY continued to struggle on the back of increased oil prices. The BoJ has not yet indicated any intention to intervene, and there have not been any hawkish comments. We are now into the high 159s for the USD/JPY though, and in the past, there has not been a forewarning of intervention, so the risk remains high.

The EUR saw a mixed day, rising against some but falling against other currencies. France and Germany's April PMI data were evidence of the negative effects of the Iran war and that the Eurozone is not immune. The GBP had more positive PMI data but remains a little subdued thanks to energy price pressures. Local elections in the UK on the 7th of May also add some political risk, but this morning has seen a very strong beat in UK Retail Sales, a full 0.7% above the expected target. Last month's figures were revised down, further adding to competing pressures on the GBP.

Commodity currencies remain mixed, caught between competing drivers of higher oil, safe-haven demand, and tempered risk appetite. CAD saw support from oil, the AUD drifted on reduced risk appetite, while the CHF saw a small boost thanks to safe-haven demand. These are all heavily affected by geopolitical news, so their focus remains squarely on the Middle East for now.

Indices

Yesterday saw a small pullback in most markets, particularly the US indices, as we saw some weaker earnings figures from companies such as IBM and ServiceNow. This was coupled with some waning in confidence that the worst of the Iran war is behind us. It will be interesting to see how the indices react if there is negative news over the next few days. Will it burst a bubble and see the market plummet, or will the blinkered 'full steam ahead' narrative hold out?

The FTSE fell again yesterday, further falling back from recent highs thanks to the index being less reliant on tech companies than the US equivalents. It could be an early chance to jump on pullbacks in equity markets. There is a risk that US markets do not pull back to give technical traders a chance to jump on the bandwagon, so the UK market could prove an opportunity worth keeping an eye on.

Precious Metals

Gold and silver both fell back yesterday due to continued Middle East uncertainty and higher oil prices, leading to reduced rate cut expectations. Both markets have key psychological levels on the horizon if they continue to fall, with gold at $4500 and silver at $70. Any move down to these levels, coupled with a resolution in the Middle East, could lead to an interesting chance to ride a wave back to the all-time highs at the start of the year.

Todays Market Drivers

• Iran - As with every day at the moment, any significant news from the Middle East will be the main market driver. Signs of peace talks or a possible resolution will boost risk-on assets and those exposed to energy prices, while any increased aggression would boost safe-haven assets and the USD in particular.

• CAD - Retail sales are released this afternoon. They will have some effect but will be overshadowed due to Canada's exposure to oil prices.

• USD - UoM Consumer Sentiment is also released later today, which could add a little fuel to either side of the rate cut discussion but will also be overshadowed by news from Iran.