Whiplash
A highly volatile start to yesterday’s trading session saw a flight to safety in markets. Despite the Dollar having lost much of its appeal as a safe haven lately, there was still an identifiable USD bid prior to and during the European open. We have identified recently how markets have clearly differentiated between general and geopolitical risk, the latter often generating greater demand for USD. GBPUSD approached one-month lows upon the associated risks to commodity prices, particularly oil, amidst speculation US military intervention in Iran over the weekend may risk the supply of oil through the Strait of Hormuz.
However, prompt futures in WIT and Brent crude fell gradually from their highs, dropping several dollars per barrel during the session. Legs lower in the price of oil accompanied POTUS’ posts on Truth Social, copied below:
“EVERYONE, KEEP OIL PRICES DOWN. I’M WATCHING! YOU’RE PLAYING RIGHT INTO THE HANDS OF THE ENEMY. DON’T DO IT!”
Followed by:
“To The Department of Energy: DRILL, BABY, DRILL!!! And I mean NOW!!!”
The US is a net exporter of oil with immense strategic reserves. Higher oil prices amidst inelastic US demand are a net positive to the Dollar, driving the Dollar higher during the European session. However, Trump’s postings later in the afternoon were clear signals that the President wouldn’t tolerate a risk to growth to manifest from a spike in oil prices. This allowed the defensive bid into the Dollar to unwind whilst the tailwind to US oil revenues also faded. Some geopolitical risk remains for now, but the potential risks to the economy seem far less sizeable based upon Trump’s admonition to keep oil prices contained. This rhetoric allowed the Dollar to decline with cable rallying almost 1%. EURUSD showed a trough to peak rally of 0.8% after Trump’s posts. Both pairs have continued to rally overnight to close to year-to-date highs. This is on the back of initiatives of a cease-fire between Iran and Israel announced by Trump overnight.
Discussion and Analysis by Charles Porter
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