Commerzbank’s Thu Lan Nguyen notes that negotiations between the United States and Iran have failed while Washington threatens a blockade of the Strait of Hormuz, risking a sharper global shortage of Oil and gas. Despite this, Brent trades just above 100 USD and EUR/USD below 1.17, suggesting markets still expect eventual de-escalation and thus keep risk premia contained.

Energy shock and FX risk pricing

"The first negotiations between representatives of the governments of the United States and Iran have ended without results. This was to be expected given the mostly diametrically opposed demands of the two sides. However, after agreeing on a two-week ceasefire in the conflict, many might have hoped that the worst was behind us."

"Yet, these hopes have now been dashed with the US threatening a complete blockade of the Strait of Hormuz, which apparently aims to entirely choke off even the limited shipping traffic tolerated by Iran through the strait. This move is likely to significantly exacerbate the global shortage of oil and gas in the short term."

"At the time of writing, market movements remain limited. Brent crude is trading at just above 100 USD per barrel and EUR/USD has slipped to below 1.17 - a good distance away from the extreme levels seen during this conflict."

"As long as the market remains hopeful, risk premiums, such as implied EUR/USD volatility, are likely to stay at comparatively low levels."

"Although these revised expectations have had little impact on the FX market so far, this issue is likely to become increasingly relevant to currency performance in the coming months, should the war intensify again."

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