Euro surges as tensions cool and trade focus returns
Almost overnight, the euro has shaken off its recent geopolitical burden. EUR/USD has surged past the $1.1620 mark at the time of writing, with traders brushing aside concerns tied to recent conflict. The rally began the previous day, spurred by widespread doubts that the situation would worsen. Iran’s strike on a US base in Qatar, which came with significant warning, was generally perceived as more symbolic than serious. Former President Trump dismissed it as “a very weak” move.
Everything shifted, however, when Trump announced a ceasefire deal between Iran and Israel, reached through direct negotiations with Israeli Prime Minister Netanyahu. Iran agreed, provided Israel refrained from further military action. Netanyahu has since issued a formal statement confirming Israel's commitment.
With this development, it seems fair to say that the euro is no longer weighed down by the political risks that had recently held it back. Even if the ceasefire proves fragile, the single currency appears better insulated against further declines.
There are a few reasons for this. Firstly, the US dollar continues to lack upward momentum. Even with Washington stepping up its involvement and oil prices climbing, bearish sentiment surrounding the dollar is suppressing its traditional safe-haven appeal. Secondly, the European Central Bank remains a source of stability. While both the Federal Reserve and Bank of England signal mixed messages, the ECB has stayed firmly on the hawkish side. President Lagarde and her colleagues have reinforced the idea that rate cuts may not be coming any time soon, which has helped the euro hold its ground despite weaker economic readings.
Indeed, lacklustre eurozone purchasing manager data briefly interrupted the euro’s rise, with EUR/USD dipping into the $1.14 range. June’s composite PMI was unchanged from May at 50.2, suggesting economic momentum is losing steam. Lagarde acknowledged these headwinds in a recent address to the European Parliament, citing survey data pointing to softening short-term prospects.
Looking forward, with political uncertainty now less prominent, attention is likely to shift back to trade and broader economic factors as the primary influences on the euro’s direction.
Markets steady despite tensions as focus turns to Iran’s next steps
As the week begins following the US airstrike on Iranian nuclear sites, a sense of unease lingers across financial markets. The uncertainty stems from three primary concerns. First, there is doubt over whether the strike achieved its intended outcome. Iran’s Fordow facility lies deep underground, and even with Washington’s sophisticated arsenal, it's unclear whether key enrichment operations were disrupted. Second, markets worry that Iran could interpret the attack as a direct threat to its sovereignty and retaliate more aggressively than anticipated. Third, there’s the risk that Tehran could leverage oil as a strategic tool, either by curbing exports or disrupting shipping through the Strait of Hormuz, which would send shockwaves through global markets.
Even so, investors have shown relative composure, likely due to the nature of Iran’s initial retaliation. So far, missile attacks have targeted US bases in Qatar and other allied locations, but have stayed within what many consider an expected range of response. Crucially, as long as there are no casualties among US forces, a broader escalation seems less likely for now.
The real point of uncertainty lies with the Strait of Hormuz. It remains to be seen whether Iran has both the means and the motivation to restrict passage through this vital shipping route. Any such action would not only harm Iran’s own economy but also impact its key trading partners, particularly China. With roughly one-third of China’s oil imports originating from Gulf nations, and over 80% of shipments through Hormuz bound for Asia, Beijing would feel the impact almost immediately.
At present, the scenario of a full-scale disruption in Hormuz appears unlikely, but risk remains elevated. The direction of market sentiment in the days ahead will hinge on how Iran chooses to follow up its initial response, and whether the US decides to further escalate its involvement.
Meanwhile, oil prices have slipped below $70 per barrel, equity markets are regaining stability, and volatility is beginning to ease. Against this backdrop, it is becoming increasingly apparent that betting on a stronger US dollar has been a frustrating position for many North American investors. While the broader downward trend for the dollar has moderated somewhat, this brief episode of geopolitical stress may have presented dollar bears with a fresh opportunity to re-enter the market.
Sterling bounces back as global tensions ease
GBP/USD has climbed nearly 1.5% from yesterday’s low of $1.3371, buoyed by a calming of geopolitical tensions. The recovery comes as little surprise, given sterling’s pronounced sensitivity to changes in global risk appetite.
In the current climate, the pound remains more exposed than the euro when sentiment shifts. What’s more, ongoing speculation about a potential global pivot away from the US dollar in reserve holdings has bolstered the euro’s standing. As the world’s second most-traded currency, the euro has taken on a more defensive role, gaining credibility as a relative safe haven compared to sterling.
