Markets have rallied sharply following the announcement of a two-week ceasefire between the US and Iran whilst they negotiate a lasting peace deal.
Given the de-escalation, the relief across global markets has been immediate and dramatic. Oil prices have tumbled and equity markets have surged on expectations of a resumption of oil and gas flows through the Strait of Hormuz. The drop in oil prices is being described as the biggest one-day fall since the 1991 Gulf War with Brent Crude falling by around 16%. The USD has also been heavily sold as the safe-haven demand that has underpinned it throughout the conflict quickly evaporated and as traders recommenced pricing in Federal Reserve interest rate cuts for later this year.
Peace talks are due to begin on Friday in Pakistan and may be extended if both parties agree, which gives some hope that this is more than just another pause. That said, it’s important to not get too getting carried away as there's still a risk that the war could restart any time, as they’ve not officially ended the hostilities. Furthermore, some of the proposed demands from both sides could prove too difficult to overcome in the talks.
As a result, the GBP/USD has moved 2-cents higher from yesterday evening and trades closer to the higher end of where it’s traded since the onset of the war. The EUR/USD rallied over 1.5% and trades around a 5-week high. The GBP/EUR has moved to an 8-day high after gaining half a cent from yesterday's low.
Markets will be closely watching how the peace talks develop over the next two weeks. If genuine progress is being made and the Strait fully reopens, then there’s a chance we might see further USD weakness and a continued recovery in risk currencies. However, if talks stall or fighting resumes, the moves seen over the past six weeks could quickly return.
