Weekly Market Update

Oil prices slide as deal to reopen Hormuz edges closer

Renewed hopes of a peace deal between the US and Iran are providing some support for risk currencies this week.

Highlights:

President Trump has raised optimism over a deal this week, saying that “very good” discussions were had between mediators, while Treasury secretary Bessent noted that a deal to reopen the Strait of Hormuz could be reached today. There remains a long way to go even in the event of an agreement – this is expected to facilitate no more than a temporary reopening of the Strait for a period of 60 days, while talks on Iran’s nuclear programme may be a tougher nut to crack. Investors remain upbeat nonetheless, with Brent crude retreating below $80 a barrel, while the safe haven dollar is trading modestly lower.

We note, however, that the greenback is holding up reasonably well under the circumstances, which may be partly due to the extent of the sell off seen last week and the notion that a reasonable degree of war optimism was already priced into the value of the US currency. We have also seen a mild upward repricing in Federal Reserve rate expectations in the past few trading sessions, with markets concluding that the FOMC may be forced to hike rates in September even if only to preserve the bank’s inflation fighting credibility. Friday’s payrolls report for July will be key in this regard.

USD

Falling oil prices, together with the prospect of an imminent reopening of the Strait of Hormuz, represent a bearish development for the dollar. Yet although the greenback has edged lower against its peers this week, it isn’t showing the kind of fragility that would signal a material unwinding of safe haven flows. This is partly because market positioning already reflected a fairly high degree of optimism around an Iran war de-escalation, while the other key sticking point in negotiations – the future of Iran’s nuclear ambitions – remains far from resolved.

Friday’s nonfarm payrolls report will be the main macroeconomic risk event for markets this week. Recent communications from FOMC chair Warsh have suggested that the Fed feels under no real pressure to raise rates this year, though a hot labour market report could change things somewhat. Economists are pencilling in a job creation number around the 80k mark, which would mark a slight acceleration relative to June and above the current estimated breakeven rate of employment growth.

EUR

Last week’s joint US-Japan FX intervention in the yen took an unusual form, as the New York Fed reportedly sold euros, rather than dollars, in order to fund its JPY purchases. This perhaps acted to exacerbate the move lower in the EUR/JPY pair and may have inadvertently capped gains in EUR/USD as well, though clearly this was more than offset by the broad deterioration in sentiment towards the dollar.

At current levels, we think that the euro is fairly accurately priced and better reflects the turn for the better in economic news out of the Euro Area and the high likelihood that the ECB will raise rates at its next meeting in September. Whether it is able to hold onto its gains this week could depend largely on the latest headlines out of the USIran peace talks, with a confirmed re-opening of Hormuz likely to lend further support. Revised PMI figures (Wednesday) and June retail sales (Thursday) will also be closely watched.

GBP

GBP/USD made solid gains towards the end of last week, though this was almost entirely a by-product of broader dollar weakness rather than sterling strength. Indeed, the pound has actually lost ground against the euro over the past couple of weeks. While the retreat in global oil prices is generally seen as supportive for sterling, it has proven even more bullish for the common currency.

Prime Minister Andy Burnham has come under a bit of flak this week for disappearing on holiday after just two weeks in Number 10. While that means a temporary pause to the litany of policy announcements unveiled in his first few days in office, it is unlikely to offer much respite from the scrutiny his early decisions have attracted, namely questions as to how he plans to fund the tax cuts he’s unveiled thus far. It also looks set to be a quiet few days of macroeconomic announcements this week, with revised PMI figures on Wednesday the only real data release of note.

Economic Calendar

Wednesday (05/08)

Thursday (06/08)

Friday (07/08)