7th May - A Defining Day

Forex

Yesterday saw what could turn out to be the most significant development since the start of the Iran War, with news breaking that the US and Iran were closing in on agreeing to a one-page 'Memorandum Of Understanding'. This would bring an end to hostilities and trigger a 30-day period to resolve the nuclear issue. The key point of note here is that the US position has changed. The US has consistently asserted that nuclear disarmament must be agreed to at the same time as an extended ceasefire, something that Iran has always pushed back on. This now seems to have been dropped, which is the catalyst for the breakthrough in talks. This could be key, as it leads to a realistic path that both sides could be willing to agree on. It could signal an end to the circular standoff, but attention needs to be paid to Israel and its stance both in Iran and Lebanon. This could either be the last domino to fall before a deal or a roadblock holding up progress.

The news sent shockwaves through all currencies, with the response expected today from Iran likely to do the same. The USD fell on the news as expected, the DXY fell -0.7% initially before recovering to -0.3% by market close, the removal of safe-haven demand and a reduction in inflationary pressures removing the demand that had been built over the past weeks and months.

It is worth noting that we saw a slightly negative ADP Non-Farm Employment Change figure yesterday (109k against an expected 118k), which could be a signal for weaker NFP figures tomorrow. This would be a competing pressure on the USD from the risk-on trend should the US and Iran come to an agreement. It will not have the same magnitude, but would dampen the move and could be a longer-term signal that the US jobs market is not as strong as hoped.

Beyond the risk-on swing, it is interesting to look at how the reduction in energy inflation pressures affects markets. The EUR will be more affected by energy prices than the USD, as the US is able to produce more of its own energy if needed. This could push back against the USD lower narrative and lead to an interesting push and pull on the EUR/USD. The geopolitics should still push this pair higher, but if we see weak NFP numbers tomorrow, this could be far less of a push than many may expect. If we are looking to trade against the USD, it may be beneficial to look elsewhere.

The GBP, on the other hand, is subject to concerning gilts figures, with the 30-year gilt reaching 5.78% yesterday, the highest since 1998. The key question is why they are so high, as higher yields can sometimes help and sometimes hinder the underlying currency. In this case, the yields are raised due to uncertainty about the UK economy and its future, with the BoE predicted to need to raise interest rates to curb inflation fears. While this would normally be a benefit for the GBP, if investors have no confidence in the UK economy, they are far less likely to invest their funds in GBP, potentially causing the currency to fall and not rise. This is another pair where the expected USD weakness may not be as prevalent as may be expected due to issues with the GBP itself. This is another one to watch over the next few weeks.

There was another suspected BoJ intervention early yesterday, pushing the USD/JPY down briefly below 155.500. The updates in the Middle East could put further pressure on the pair as USD demand falls and gives the BoJ more room for rate hikes due to an improved trade deficit. However, the fundamentals are still lined up long for the currency for the moment, so until we see a confirmed break of 155.00, I would be hesitant to gamble on either direction.

One of the big beneficiaries of the news from Iran was the AUD, which rose 0.8% yesterday. The AUD seems in pole position to benefit from the end of the conflict. The RBA's already hawkish tone combined with it being a risk-on currency means the news should have a broadly positive effect. Moreover, the likelihood of gold prices increasing due to the news will benefit the AUD, since Australia is a major gold producer, further boosting the potential momentum of the AUD. Depending on the Iranian response today, a long trade in the AUD/USD could be an excellent short-term bet depending on the trading strategy employed.

Indices

At the risk of sounding like a broken record, indices once again saw a blockbuster day. The S&P, the Nasdaq, and Nikkei all saw fresh all-time highs, while the Dow and the FTSE 100 saw healthy gains back towards their previous highs. This came off the back of the AMD earnings further boosting the AI story and the risk-on news from the Middle East, a perfect storm for optimism in the markets. It is worth noting, while the war is damaging low-income consumers, it is overwhelmingly benefiting energy companies and is driving AI infrastructure investment. The indices are looking very healthy, but this does not necessarily mean that the economy as a whole is healthy. The NFP figures tomorrow will be an important marker; more positive news and the stock market will move to a whole new level of optimism, while a poor number could wipe the shine off a record period. The markets currently seem very overextended, a long way from their EMAs and showing significantly overbought on the daily RSI. While these are not catalysts themselves, they are a sign that the market may have gotten ahead of itself, so a pullback may both be healthy and necessary in the near future.

Precious Metals

As expected, the good news from the Middle East was positive for both gold and silver. As we had flagged, while the safe haven of gold would not normally benefit from risk-on news, in this case, the reduced inflation pressure and thus reduced rate hike narrative have benefited precious metals against other assets.

It will be very interesting to see how the metals continue to move. If we see purely positive news from the markets, we may see the demand fall away as investors look for more traditional risk-on assets. However, should we see peace in the Middle East coupled with signs of an economy slowing down, we could get a perfect storm of underperforming risk-on assets and a renewal in the safe-haven demand for precious metals. If this is the case, we could see gold push back to $5000, silver push to $100, and maybe even a move back to previous all-time highs. Both are markets to keep an eye on and to possibly buy into over the coming weeks.

Today's Key News Events

• Iran's Response To The US - This will be by far the key news point of the day, one that will have ramifications for weeks and months to come. There are no other significant news events today, so the market's full focus will be on the outcome of talks. Positive news and we have lift-off, negative news and we return to the circular standoff and renewed market uncertainty.

• UK Gilt Yields - This is not a news event as such, but it will be a market to keep an eye on as it will have a large effect on the direction of the GBP moving forward.