President Donald Trump again postponed the deadline of his ultimatum. Today, he announced that he had delayed strikes on Iranian power plants for another 10 days. Notably, EUR/USD traders reacted weakly to this, admittedly high-profile, news. The pair continues to drift down slowly, but confidently, toward the base of the 1.15 figure. One could say that this time market participants simply ignored an important de-escalatory signal. Traders are still "holding the greenback," thereby demonstrating skepticism about the prospects for a peaceful settlement of the Middle East conflict. And, judging by a number of signs, this skepticism is well founded.
First, Iran denies that any negotiations are taking place. It remains unknown who exactly the US is talking with in Tehran (if such talks are taking place at all). Donald Trump's argument that Iranian officials deny everything for fear of being killed is considered by many analysts to be unconvincing. Traders, for their part, fear that all the White House chief's claims about talks are merely an attempt to calm markets in order to push oil prices down, which stubbornly remain near the $100 mark.
Second, many media leaks signal that Washington is preparing for a new escalation in the region. According to The New York Times, the US will almost certainly begin a ground operation against Iran — a corresponding decision has allegedly already been made in the White House. This scoop resonates with information from the British Daily Mail, which reports that many Republican congressmen dramatically left a closed briefing on Iran in Congress, criticizing the Trump team's plans. US lawmakers said the president is preparing a ground operation in Iran without Congress's approval. Among the stated objectives of the planned operation is the capture of Iran's Kharg island.
Third, the United States is building up its military presence in the Middle East. The Pentagon has previously ordered the deployment of some 2–3 thousand marines from rapid reaction forces. In addition, two Marine expeditionary units are being sent to the Persian Gulf coasts. Altogether, this adds roughly 5–6 thousand troops specializing in amphibious operations (beach landings). Moreover, as the Wall Street Journal reports, the Pentagon may soon send an additional 10 thousand US service members to the Middle East to give President Trump more military options.
In other words, the market is forced to make trading decisions against a contradictory information background. Trump and Rubio claim excellent progress in negotiations, while the military simultaneously deploys aircraft carriers and thousands of marines to the Middle East. Market participants reasonably fear that the declared diplomacy, in the present circumstances, is a kind of smokescreen. Not to mention that Tehran denies any talks, and, according to the Wall Street Journal, did not request a ten-day pause in strikes on its energy facilities from the US.
According to some military analysts, Washington is considering several scenarios: the seizure of Iran's Kharg island and/or assaults on the Hormuz islands (in particular, Qeshm and Larak). Capturing these territories would theoretically give the US the leverage to issue an ultimatum — either Iranian authorities negotiate terms for ending the war (including unblocking the Strait of Hormuz), or they lose oil revenues. At the same time, it is known that Iran is not sitting idle and is actively preparing by deploying additional forces to Kharg and mining the perimeter.
In other words, judging by EUR/USD's behavior, traders do not believe in a near-term happy end and view Trump's statements about diplomatic breakthroughs with skepticism. It can be assumed that interest in risk assets (including the euro) will rise only if diplomatic progress signals come from Iran. Otherwise, demand for safe-haven assets (primarily the dollar) will persist, putting pressure on EUR/USD.
Under the current circumstances, corrective price spikes in the pair should be used as opportunities to open short positions. As we see, Trump's peaceful messages do not have a noticeable impact on the FX market (nor on the oil market, incidentally), whereas numerous leaks point to a continued conflict in the Middle East. This means that the safe dollar will continue to enjoy heightened demand as a defensive asset. The nearest target of the southward move is 1.1500 (the lower Bollinger Bands line on the four-hour chart).
