27th April - Breakthrough?

Forex

We saw a hugely significant development overnight, with news that Iran has given the US a new proposal to open the Strait of Hormuz and end the war, then delaying negotiations around the nuclear question to a later date. This came after a rollercoaster Friday, where the Iranian delegation arrived in Pakistan only to hear that the US had canceled their team's trip before take-off.

The nuclear issue has been the most significant sticking point in the negotiations, so the chance that this could be put to one side for the moment could be huge for the potential end to the conflict. It could give both sides an off-ramp and allow them to come back to the topic later once heads have cooled.

The proposal was a boon for risk-on currencies and a push down on the USD. After a gap higher on the news that the US did not travel, the DXY fell on the news of the Iranian proposal. The EUR/USD saw a strong push up on the news, energy-dependent Europe receiving a boost on the news along with the Dollar weakness. The same applied to GBP/USD, which saw a bid. Both the GBP and EUR face big weeks this week; on Thursday, both the ECB and BoE have their April interest rate decision. If we have seen concrete agreements in the Middle East and falling oil prices easing inflation fears, the central banks will have a far different outlook on their forecasts and could potentially shift policy in a dovish direction. Both decisions and the guidance that comes with them are key for the week.

The oil-dependent JPY also saw support after the weekend's news; a move away from the key 160.000 level in the USD/JPY could see the BoJ's goals met without the need for manual intervention. The commodity currencies were mixed over the weekend; the CAD faces pressure from lower oil prices but support from improved global sentiment, while the risk-on AUD saw support. As with all things over the past few weeks, the direction of these markets this week will rest heavily on the US's response to Iran's proposal.

Indices

The S&P and Nasdaq yet again saw new highs on Friday, thanks in large part to blowout earnings from Intel. This meant the two saw the fourth consecutive week of gains, which have the potential to only be encouraged by the news in the Middle East. The Nikkei also saw a rise, while the Dow stayed relatively level and the FTSE continued to pull back on higher oil prices we saw at the end of the week.

This week's earnings calendar is huge, potentially the largest for the entire Q1 season. Four of the Mag 7 release their earnings on Wednesday, with Apple and Mastercard coming on Thursday. Ultimately, all markets care about are earnings — geopolitics and oil only matter because they threaten them. That makes this week's results the real test of whether the rally has genuine foundations. Either the optimism and record highs are validated, or exposed as built on hope and nothing more.

Precious Metals

Gold and Silver edged higher this morning on the news overnight, thanks to renewed potential for FOMC rate cuts this year. If the deal materializes, the possible Fed cuts make non-yielding assets such as Gold and Silver more attractive. Both markets will be sensitive to news from the Middle East this week.

This Week's Market Drivers

• Iran - Trump is meeting in the situation room today with his advisors, a signal of openness to the separation of the nuclear issue will have a significant impact, pushing risk-on currencies up and putting pressure on the USD. Indications the other way will have the opposite effect.

• Interest Rate Decisions - The FOMC and BOC release their guidance on Wednesday, the BoJ is tomorrow, then the BoE and ECB are on Thursday. Both potential rate decision surprises and the tone of the guidance released with each Central Bank will have a significant effect on the relative currencies, as well as an effect on the sentiment of the wider market.

• Earnings Releases - The releases on Wednesday and Thursday will be huge for the indices, but will also have a wider effect on risk sentiment as a whole. Strong numbers will give encouragement that the recent highs are justified, weak numbers could burst the optimism bubble violently.