USD: Domestic realities test the limits of Iran’s campaign
Domestic realities test the limits of Iran’s campaign just as a fresh wave of contradictory signals from Washington and Tehran reverberated through markets. President Trump said yesterday that the Strait of Hormuz would reopen “soon” under joint control with the US, even as Iranian state media denied any negotiations had taken place. Brent crude briefly fell toward $96 before trimming losses as traders tried to reconcile the contradictory messaging, while Trump simultaneously suspended his threatened strikes on Iran’s energy infrastructure, citing “good and productive” talks and a desire to secure a broader settlement. Israeli Prime Minister Benjamin Netanyahu added his own pressure by releasing a video saying he had spoken with Trump, that Israel would “protect essential interests,” and that Israeli forces had “killed two more nuclear scientists” in recent days while continuing strikes on Iran. UK Prime Minister Keir Starmer then disclosed that London had been aware of US–Iran contacts before Trump mentioned them publicly, underscoring how geopolitical signaling is increasingly shaping economic expectations. All of this is landing atop an already‑strained Iranian economy, fragmented further after the killing of Ali Khamenei, leaving the country with frayed command structures and a less coordinated military campaign.
Washington’s urgency makes sense: the domestic inflation channel runs straight through oil and gasoline, and the fixed income repricing has pushed mortgage rates higher. This helps explain why the White House has leaned into every opportunity to cool the energy risk premium, including Trump’s earlier March 4 pledge of DFC‑backed political‑risk insurance and, if needed, US Navy tanker escorts, which momentarily steadied crude when announced. The president doubled down from Tennessee, claiming Iran had “bragged” about possessing nuclear materials, that talks “started last night, a little the night before,” and that there was now a “very good chance” of securing a new agreement within days, again asserting Iran “means business” and “wants to settle.” Markets responded in typical fashion: crude eased, equities firmed, and hedging flows tightened as traders interpreted the rhetoric as an attempt to nudge sentiment toward de‑escalation. But Tehran immediately rejected the narrative, publicly denying any talks and insisting Trump was using negotiation language to influence markets and walk back earlier threats under pressure.
Against this volatile backdrop, the longer the Strait remains constrained, the larger the eventual economic shock. UNCTAD data show ship transits collapsing, while the IEA reports regional supply losses on the order of at least 10 mb/d as Gulf producers hit storage limits and cut output. Even the record 400‑million‑barrel emergency stock release, coordinated among IEA members, only covers a fraction of lost flows, equivalent to weeks, not months, explaining why prices remain hypersensitive to every scrap of news. The dramatic intraday move yesterday, when US equities surged on Trump’s claims of “productive conversations” before retracing as Iran denied everything, perfectly illustrates how sentiment is oscillating around geopolitics rather than fundamentals.
On the FX front, the dollar continues to outperform as a classic safe haven while the yen lingers near levels that invite intervention chatter, reflecting Japan’s heavy exposure to imported energy and the market’s near‑fixation on the USD/JPY 160 line. Options markets confirm this stress: risk‑reversal skews flipped in favor of dollar calls earlier this month, but since, it has turned slightly bearish, evidence of stretched positioning that unwinds sharply as oil retraces on hopes of a credible de‑escalation. Crucially, the dollar’s beta to oil remains far lower than in previous shocks; the US is considerably less dependent on Middle Eastern seaborne crude than Europe or Asia. As a result, today’s dollar strength is driven more by risk‑off flows than by terms‑of‑trade, making it inherently fragile if geopolitical tensions ease or markets conclude that the worst energy disruptions have already been priced.
EUR: Front‑end eases, euro lifts
Yesterday saw the euro gain ~0.5% against the dollar while eurozone members’ yield curves – particularly at the front end – moved lower. Trump’s decision to postpone the deadline attached to his recent militaristic threats helped ease market fears, pushing oil prices lower and unwinding some of the recent rates tightening re‑pricing. He also pointed to presumably resumed talks between the two sides, which he suggested were progressing well. Iran, however, denied that any diplomatic efforts were underway.
Uncertainty remains elevated. And while the TACO trade – Trump Always Chickens Out – may well be in full motion, the combination of Iran’s dismissal of any deal, its de‑facto control of the Strait of Hormuz, and Israel’s apparent indifference to Trump’s remarks as it continues launching fire in the region leaves too many unknowns for Trump’s de‑escalation rhetoric to reinstate a more robust sense of optimism.
The euro’s direction of travel yesterday was understandably broad against the dollar, with an intra‑day low of 1.1485 and a high of 1.1640 – a 1.35% peak‑to‑trough move. The currency remains primarily a reaction function of energy prices, which meant that the partial unwinding of recent hawkish re‑pricing was insufficient to offset the euro’s rebound. An equivalent softening in USD rates further muted the rate‑differential drag on EUR/USD, leaving the energy‑driven relief as the dominant force.
On further signs of de‑escalation, a break above the 21‑day MA at 1.1617 – which has acted as a bearish guide since the conflict began on 28 February – would mark the first meaningful challenge to short‑term downside momentum. A sustained breach would indicate that buyers are actively leaning against the prevailing trend, opening the door toward the March 10 high at 1.1667.
GBP: BoE hawkishness finds clearer expression
Sterling’s sharp rebound – more pronounced than the euro’s – on tentative de‑escalation signs yesterday was telling. The currency has benefited from a stronger shield in the form of a more aggressive BoE repricing since the conflict began on February 28. Not only was the adjustment larger, it also felt more credible, with the Bank’s biggest headache still being hot inflation. The prospect of additional price pressure following the conflict made an already tentative easing bias even less plausible. A cleaner pass‑through of higher energy costs into the wider economy, owing to the UK’s more liberalised and less state‑buffered energy market, further amplified perceptions of the BoE’s readiness to tighten.
Meanwhile, yesterday’s tentative signs of de‑escalation restored risk sentiment somewhat, triggering a rebound in sterling crosses given the currency’s high‑beta tendencies. But the reasoning may be more nuanced. The improved market mood may have unlocked the bullish rates pass‑through into FX more cleanly, as the BoE remains hawkish while the heavy hit to growth has been (very) partially unpriced. Sterling therefore finds itself navigating a fine balance: BoE support retains more of its influence as de‑escalation signals spread across markets.
Amid all of this, a shorter positioning base than the euro’s adds to the more aggressive unwinding of shorts when improving sentiment allows the full rates transmission to reassert itself.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
