Iran

Over the last two trading sessions, WTI crude oil has once again displayed a notable bearish bias, with prices falling nearly 6%. Part of this renewed selling pressure has been driven by recent developments in the Middle East, which have helped temporarily ease the geopolitical tensions that had supported the oil risk premium in previous weeks.

Crude oil prices continue to press higher amid the ongoing standoff between the US and Iran. While the softness in US and Chinese data of late does point to some moderation in demand, oil prices remain predominately supply-driven.

Crude oil and bond markets are flashing warning signs for risk assets. Yet, investors seem remarkably relaxed. However, if the current situation doesn’t improve markedly, we could see stock markets stage a bit of a correction and in the FX space risk-sensitive currency pairs could take a dip.

Volatility across financial markets continues to subside, with investors appearing surprisingly comfortable with rising oil prices and the prospect of the Fed either holding rates steady or tightening policy in September.

The US dollar rebounded this morning and that caused the EUR/USD and the price of gold and silver to ease back from their earlier highs following yesterday’s big precious metals rally.

Earlier today, we saw some headlines that Pakistan may announce later that talks between Iran and the US will resume. Apparently, Iran’s finance minister Abbas Araghchi is set to visit to Pakistan. But this doesn’t mean talks will start with the US. So, I would be careful reading too much into this, but markets have reacted and we saw European indices bounce back while crude oil dropped a good $4 from its earlier highs in immediate reaction.

The EUR/USD reversed earlier gains to close lower on Friday after the earlier optimism about the Strait of Hormuz re-opening failed to keep the dollar and crude oil under sustained pressure. While crude oil fell about 9% on the day, it closed well off its earlier lows.

While European markets pulled back as oil prices found renewed support, risk appetite on Wall Street was holding up rather well, with investors on Wall Street seemingly content to look past the ongoing noise out of the Middle East and instead focus on the broader macro picture.

The gold outlook may have turned a bit more bearish heading into the new week, with geopolitics once again being the reason. The recently announced ceasefire agreement between the US and Iran had taken some heat out of the market. There was cautious optimism that weekend talks in Islamabad could lead to an extension beyond the initial two-week window. However, the talks ended at the weekend without any deals.

It was a good sign to see the EUR/USD post a small gain yesterday despite the rebound in oil prices. This morning saw the currency pair hold around that 1.1700 handle ahead of the release of US PPI data later, and more importantly, US-Iran peace talks in Islamabad. It is far too early for markets to re-focus on fundamentals yet.

Equities have steadied somewhat so far into Tuesday’s session, finding a bit of a floor on reports that the US may be prepared to wind down military operations in Iran—even if the Strait of Hormuz remains shut.

Gold prices attempt to stabilise, but weak technicals and bearish options positioning warn the bounce may fade with 4,000 support in focus.