Markets return to pre-war levels

• The S&P 500 and the pound are trading higher than before the conflict in the Middle East.
• European currencies are steadily regaining the ground lost in March.

Markets are tired of geopolitics. The S&P 500 has returned to pre-war levels on expectations of a strong first-quarter earnings season and undervalued fundamentals. Oil has not risen as much as it might have amid news of a breakdown in US-Iran talks. The US dollar is no longer able to capitalise on its safe-haven status. Investors are latching onto positive news from the Middle East and ignoring the negative. In such conditions, a recovery of the EURUSD to the 1.1800 region, near where trading took place in February, appears justified.

Donald Trump, keen to see stock indices rise, is trying the hardest of all. The president claims he has received a call from Iran, and that the Iranians want to strike a deal. Then he asserts that the right people in Tehran are not averse to returning to the negotiating table. Pakistan is making titanic efforts to resolve the differences. China is ready to offer its assistance in achieving peace in the Middle East. Iran itself notes that a compromise has been reached with the US on various aspects.

Markets are more inclined to believe in a de-escalation of the conflict than in a ceasefire breach and renewed bombing in the region. This optimism is driving the EURUSD higher. Even more so as the US blockade of the Strait of Hormuz represents a de-escalation of the confrontation, compared to active military operations.

Despite the uncertainty, hopes for peace in the Middle East are growing, allowing speculators who have built up net long positions in the US dollar to 14-month highs to wind them down. The unwinding of greenback positions is in full swing, adding momentum to EURUSD buying.

Other European currencies are also performing strongly. The pound has returned to pre-war levels, whilst the Swiss franc and Swedish krona are very close to doing so. The Norwegian krone is poised to hit its highest level since June 2022.

Gold has recovered quite quickly. Investors are restoring their share in their portfolios, which had fallen due to the need to meet margin requirements on equities. Consequently, the rise in the S&P 500 is also supporting demand for risk assets, including precious metals.

The FxPro Analyst Team