Iran’s proposed interim ceasefire deal, which would reopen the Strait of Hormuz while postponing nuclear talks, has been met with little enthusiasm in Washington, according to the latest reports. That is pushing markets back into a higher-uncertainty regime, with oil prices staying well- supported.
In theory, this should be a favourable environment for the dollar, yet USD has found only limited support so far. We see two reasons. First, US equities continue to show remarkable resilience, and corrections in RoW stock markets have also not been dramatic. That remains a key missing link for a sustained dollar rally; EUR/USD, like many other USD crosses, currently shows a higher beta to global equities than to oil prices or rate differentials. Second, month end flows should be acting as a drag on the dollar, given relative US equity outperformance in April.
Against that backdrop, markets have reverted to favouring high beta commodity currencies such as the Australian dollar, the New Zealand dollar, the Norwegian krone, and the Canadian dollar. These currencies, however, remain vulnerable to disappointing earnings from US tech firms this week, to which US equity indices appear more sensitive than to war headlines.
Once month end flows roll off in the coming days, barring tangible progress in negotiations, we would expect USD gains to accelerate. For today, some focus will be on consumer confidence figures, although a wait and see approach ahead of tomorrow s FQMC decision and big tech earnings (Alphabet, Microsoft, Amazon and Meta) could keep volatility in USD crosses somewhat contained.
Elsewhere, the Bank of Japan held rates, as expected, at 0.75%. The 6-3 vote marks the most significant divergence seen during Kazuo Ueda’s tenure as Governor, indicating increased momentum towards policy normalisation. Market participants currently estimate a 74% probability of an interest rate increase at the Bank of Japan's next policy meeting, scheduled for 16 June.