- The end of Operation Epic Fury is boosting risk appetite.
- Japan is likely to continue punishing speculators.
The US dollar has lost ground following statements from the White House regarding the conclusion of the two-month ‘Operation Epic Fury’ and progress in negotiations with Iran. Investors are interpreting this as a de-escalation in the Middle East and are selling Brent. At the same time, the dollar index is once again testing the lows of the past two months amid risk-on sentiment in key markets.
Optimism could push EURUSD higher. Although its further trajectory will depend on the pace of the fall in oil prices. It will take time to repair the damaged energy infrastructure in the Persian Gulf. Therefore, it is believed that Brent and WTI will not return to the $65–70 levels seen before the conflict in the Middle East this year.
This is a pro-inflationary factor. US services PMI indices are signalling the highest price pressure since 2022, while the futures market is ramping up expectations of Fed rate hikes. It will not be easy for Kevin Warsh to fulfil Donald Trump’s wishes for a significant easing of policy. For now, traders’ attention is entirely focused on the Middle East.
The end of the conflict is driving the EURUSD up to 1.1760, and this rise will gain momentum with further signs of de-escalation. Conversely, another breakdown in negotiations and a deadlock in US-Iran relations will force the major currency pair to take a step back. And this is not merely a matter of caution, as alongside their conciliatory rhetoric, the US is building up its military presence in the Persian Gulf.
The sharp collapse in USDJPY on Wednesday suggests that the government has once again intervened in the forex market. Japan needs to properly deter speculators from using dips in the US dollar to buy it.
Rumours of a de-escalation in geopolitical tensions have catalysed a rally of more than 3% in gold, pushing it above $4,700. The fall in oil prices reduces the risk of high inflation becoming entrenched and removes the need for central banks to tighten policy. As a result, the precious metal may see a return to the debasement trade.
The FxPro Analyst Team