Commerzbank’s Michael Pfister argues that the extended ceasefire with Iran and ongoing closure of the Strait of Hormuz keep global inflation risks elevated, even if EUR/USD does not currently reflect this. He notes that renewed tensions would likely support the US Dollar (USD) more than a deal would lift the Euro (EUR), and that political noise around the Federal Reserve (Fed) and Kevin Warsh means US Dollar issues will persist.

Ceasefire, Hormuz risk and Fed politics

"A few hours ago, the US president announced that he was extending the ceasefire with Iran until the negotiations were concluded. "

"For now, however, the uncertainty continues. As long as the Strait of Hormuz remains closed, the risk of global inflation remains high and the situation is highly volatile. Even if EUR/USD does not currently reflect this: Should tensions escalate again and a deal become less likely, the US dollar is likely to benefit once more."

"Therefore, at present, the risks appear to be asymmetrically distributed. Since EUR/USD is already close to pre-war levels, any euphoria in the event of a deal is likely to be limited, while if hostilities were to flare up again, the exchange rate would likely drop significantly."

"Away from the events in the Middle East, Kevin Warsh, Trump’s nominee to succeed as Fed Chair, had his confirmation hearing yesterday. He did not announce anything new, despite making an effort to emphasise the Fed’s independence."

"However, the US president seems to see things differently, having made it clear in a recent interview that he would be disappointed if Warsh did not lower interest rates immediately upon his appointment. In addition, the Justice Department’s investigation into the Fed’s renovation costs is ongoing, despite critical senators now calling for a congressional inquiry."

"This could be a way to ensure Warsh’s confirmation proceeds as planned. Therefore, even if the war were to end, it is unlikely that we would run out of issues surrounding the US dollar anytime soon."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)