- After Trump's speech, markets are preparing for an escalation around Iran.
- Japan's failure with its monetary interventions could take it to 175.
The US dollar quickly recovered its losses thanks to Donald Trump's comments. He threatened Iran with airstrikes against its energy infrastructure if the Strait of Hormuz is not opened. The promise to send Iran back to the Stone Age contrasted with his previous statement about ending the conflict within two to three weeks amid successful negotiations. This caused it to plummet after the rebound of the previous two days.
Polymarket participants estimate the chances of the war between the United States and Iran ending at the end of June at 65%. A closure of the Strait of Hormuz before that date would be a true disaster for the world economy. The IEA warns that the oil market deficit will continue to increase. In March, the market was stable due to February supply. However, in April, conditions risk deteriorating rapidly, suggesting additional releases of strategic reserves may be necessary.
The euro is gradually losing its key support due to expectations of aggressive monetary tightening. Investors are beginning to question the ECB's past decisions. Was the biggest mistake in 2022, when it underestimated the inflationary impact of the energy crisis, or in 2011, when it raised rates in response to rising prices? That earlier tightening weakened the eurozone economy and ultimately forced the ECB to cut rates more aggressively than before.
Rising risks of an escalation of the conflict in the Middle East have halted the USDJPY correction and handed the initiative to the bulls. UBS forecasts that the US dollar will rise to 175 yen by the end of the year. An increase to $150 per barrel will make Japan's monetary interventions ineffective. The Finance Ministry's spending will simply create more favorable entry points for speculators to sell the yen. As a result, Sanae Takaichi will begin to curb inflation through fiscal measures. This will signal to hedge funds that the government is no longer concerned about the USDJPY. They will intensify their purchases of the pair.
Gold took a hit following disappointment over Donald Trump's rhetoric. The precious metal failed to hold $4,800 and is expected to return to March lows amid central banks, led by the Federal Reserve, keeping interest rates at high levels for an extended period. India has begun to defend its currency against depreciation by selling US Treasuries and continuing to accumulate. At the very least, this provides some support for gold. However, very soon India could follow Turkey's example and sell its metal reserves.
He FxPro Analyst team
