The US dollar firmed while the euro and Pound Sterling came under pressure as oil rebounded sharply after the Strait of Hormuz was closed again, reviving fears of a prolonged energy shock.
Oil Bounces Back as Strait of Hormuz Closed Again
After a weekend where the Islamic Revolutionary Guard Corps reportedly fired warning shots at tankers, maritime traffic in the Strait of Hormuz has slowed to a virtual halt, with only three vessels successfully transiting the waterway on Monday.
Tensions reached a breaking point after the U.S. Navy attacked and seized the Iranian-flagged cargo ship Touska near the strait for allegedly attempting to breach the naval blockade, an act Tehran has condemned as “piracy”.
Oil prices, which had plummeted 11% on Friday’s reopening news, have surged back by 5% to approximately $95 per barrel as the ceasefire appears to be in jeopardy and Iran signals it has “no plans” for a second round of peace talks.
Geopolitical headlines continue to cause major volatility. Markets have had to contend with two way “whiplash” as conflicting news sent oil and risk markets up into last week’s close, then down at Sunday night’s reopen.
On Friday, the headlines were overwhelmingly positive as Iran officially reopened the Strait of Hormuz, causing oil prices to tumble and stocks to climb. However, that optimism evaporated over the weekend as the waterway was closed once again following an Iranian missile attack on a commercial vessel. This rapid reversal suggests that the peace talks are in deep trouble and that the global economy must once again price in the reality of a long-term energy blockade.
The reason for the U-turn according to Iranian officials was the continued blockade of Iranian ports by the US, which the US has warned will stay in place until a full peace deal is agreed. Iran targeted the Liberian-flagged tanker Fortune Star, which was struck by an anti-ship missile while attempting to transit the Omani side of the strait. This escalation has effectively ended the short-lived period of safe passage, as war-risk insurance premiums have spiked to levels that make commercial shipping through the Gulf virtually impossible. For an global economy already struggling with inflation, this renewed energy squeeze is a significant blow.
President Donald Trump, who just days ago claimed a peace deal was “very close,” shifted his tone back to a more aggressive stance. Speaking on Sunday evening, Trump remarked, “We gave them a chance to do the right thing, and they chose to attack a peaceful tanker. This is a very big mistake by Iran, maybe the biggest they’ve ever made.” He indicated that the U.S. naval blockade on Iranian ports would be significantly tightened in response. Meanwhile, a spokesperson for the Iranian Revolutionary Guard Corps defended the closure, stating that the reopening was always “conditional on the respect of our regional interests,” and accusing Western forces of using the truce to move military assets under the guise of commercial shipping.
The events of the last 72 hours have confirmed that a quick resolution to the Middle East conflict is unlikely. The “open-and-shut” nature of the Strait of Hormuz has created an environment of extreme uncertainty that will keep oil prices high and equity markets on edge. Until there is a verified ceasefire that includes both Iran and its regional proxies, currency pairs such as EURUSD and GBPUSD could remain under pressure. This is especially true for the euro as the ECB has dialed back its hawkish stance, and markets have priced out immediate cuts. As ING note,
“We have a flurry of European Central Bank speakers in the early part of this week, ahead of the blackout period starting this Thursday. The main message continuing to come through is that the ECB is prepared to act (hike rates) should it be necessary, but that more time is needed. That means the market has priced out a 30 April hike and now attaches only roughly a 50% probably to a June hike. “
EURGBP continues to trade around the 0.87 as the euro and pound drivers cancel each other out. Neither central bank looks likely to hike rates and both economies are at risk from elevated energy costs and rising inflation.
