A technicality
Markets appeared to be fatigued by Trump’s Iran war before a ceasefire had even been agreed. This was evident from pricing that would have been considered complacent should the conflict have dragged on longer than it ultimately did. Now, that saga is far from over – it’s inevitable, for example, that as the 60-day truce draws ever closer to expiry that the prospect of renewed conflict is leveraged by both sides, thereby raising perceived risk. However, in the meantime, the market has to find a new driver. There should be many candidates to drag into focus. However, whilst the dust settles there is a vacuum to be filled.
Prior to Trump’s crusade in the Middle East, monetary policy divergence had been a major driving force. The extent to which monetary easing cycles could be sustained across developed markets was a good indicator for FX. There is a short-term hurdle to that theme resuming prime position for what is going to be driving markets. One of the legacies of this conflict is inflation and, so far, it’s too early to tell what lasting impact the commodity price shock caused by the closure of the Strait of Hormuz will have.
In this limbo period, it may therefore be technical dynamics that flourish not as a driver but as an indicator for price targets. Those technicals, at least within EURUSD, don’t look pretty. There is extremely limited technical support for EURUSD particularly following the price action of the last few sessions. As the gap between forecasts and spot levels grows ever wider in this currency pair, the risk of a squeeze of any outstanding short positions also increases. From a valuation perspective, the dollar shouldn’t have much more room to climb. But if technicals are indeed in the driving seat, USD bears should be cautious.
Discussion and Analysis by Charles Porter
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