Commerzbank’s Michael Pfister notes that the tentative ceasefire between the US and Iran and the reopening of the Strait of Hormuz triggered a sharp textbook reaction, with Oil falling and the US Dollar weakening, pushing EUR/USD back towards 1.17. He argues that revised ECB and Bank of England rate expectations are secondary for FX, with energy dependence still the key driver.

Ceasefire drives Dollar and Oil reaction

"As we have emphasised several times in recent weeks, if a ceasefire is agreed and the Strait of Hormuz is opened, the market reaction would likely be textbook: Oil prices plummeted by nearly USD 15 per barrel and the US dollar suffered significant losses - EUR/USD is moving back towards 1.17 this morning."

"Central bank expectations are also likely to be revised if the ceasefire proves sustainable and peace negotiations are successful."

"For exchange rates, however, pricing in these expectations is unlikely to be all that relevant for now."

"Currencies have hardly reacted to the pricing in of these expectations after all, but rather to the respective country’s energy dependence."

"If the situation were to escalate again, today's market reactions would likely reverse."

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