Hormuz Crisis Fuels Dollar Rebound and FX Instability

EUR/USD fails near highs as geopolitics take center stage

Markets rejoiced late last week as a ceasefire was in effect and the Strait of Hormuz was open to all maritime traffic… briefly. A day later, hopes of a prolonged peace waned as Iran reimposed limits on traffic through the Strait.

Iran pointed to the U.S. naval blockade as one of the reasons for the closure of the Strait of Hormuz. The other reason was the breach of the ceasefire between Israel and Lebanon. This ceasefire initially served as an incentive to reopen the peace talks between the U.S. and Iran.

The US Dollar Index (DXY), which tracks the dollar’s performance against a basket of 6 other major currencies, dropped on the news regarding the opening of Hormuz but erased all the losses very soon after, when Iran decided to close the Strait again. EUR/USD climbed to 1.1850, and then dropped to 1.1760 at trading close last week.

The latest developments also affected the Federal Reserve interest rate change probabilities. At the time of writing, according to the CME FedWatch tool, there’s a 26% chance of a 25-bps rate cut in December, down from 37% on April 17.

Economic Calendar Highlights

The U.S. Retail Sales will be released on Tuesday at 12:30 pm GMT, with a big jump anticipated: 1.4% from the previous 0.6%. The Core version is expected to show a 1.3% change, up from 0.5% the previous month.

Also on Tuesday, at 2:00 pm GMT, Fed Chair-Designate Kevin Warsh will testify on his nomination before the Senate Committee on Banking, Housing, and Urban Affairs. It is unclear how this testimony will affect markets, but if he offers insights on his rate stance, the impact will be notable.

Thursday will be filled with PMI releases, starting with the German and UK Services and Manufacturing PMIs early in the morning and finishing with the same indicators for the U.S. economy at 1:45 pm GMT. These are not high-impact indicators, but their effect can be notable if the actual number differs significantly from expectations.

Technical Outlook – EUR/USD

The dollar seems to be getting some of its safe-haven shine back due to the latest developments in the US – Iran war. However, this goes both ways, meaning that successful peace talks will probably decrease the dollar’s value, sending EUR/USD higher.

Currently, the pair is stuck in a long-term 500 pip range between 1.1400 and 1.1900, trading near the upper boundary. The dollar’s recent strength stems from its safe-haven appeal, but we saw that news about the war’s end can erase this strength and send the pair higher. Thus, in the current environment, technicals take a back seat to geopolitical risks.