The war in Iran, and the subsequent heightened geopolitical risk premium and acute volatility in commodity markets, make for a challenging backdrop for FX forecasting.
The US dollar rallied sharply across the board at the beginning of the conflict, as investors fled high risk assets in favour of the safe havens. Recent headline shave been far more upbeat, however, and current market levels suggest that investors believe that the worst of the war is now very much in the rear view mirror, particularly following the agreement upon the indefinite ceasefire and recent indications that a deal with Iran could begetting closer. The ongoing uncertainty over the peace process and standstill in traffic through the Strait of Hormuz, remain pressing issues, however, and are acting to keep both oil prices and volatility elevated.
Our forecasts are predicated on a base-case scenario that appears to be coming to pass, i.e. a resolution of the conflict in the near-to-medium term that ensures a relatively contained impact on global growth and inflation. The Strait of Hormuz remains effectively shut, albeit we think there is a time limit as to how long Iran will be willing to keep up this act of strategic self-destruction. We think that a phased re-opening will follow the signing of a framework peace deal in the coming weeks, with traffic to return closer to“normal” levels around mid-year or in early July.
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