A phased end to the US–Iran conflict could eventually cool oil prices and take some shine off the US dollar, but so far markets are waiting to see it happen. On the morning of 25 September, GBP/USD was flat near 1.32, the dollar stayed firm and crude held around $106 a barrel. Traders are watching the talks in New York before they act.
Key takeaways
Reuters reported on 24 September that the US and Iran are exploring a phased end to the war, which is now close to seven months old. The talks are taking place on the sidelines of the UN General Assembly in New York. According to a senior Iranian official quoted in the report, the first stage would end the US blockade and reopen the Strait of Hormuz. Access to frozen Iranian assets could come afterwards.
We have seen this before. The memorandum of understanding signed in June was meant to give both sides a 60-day truce to agree a final settlement. It collapsed long before then, in July. Neither side wants to give up its leverage first. Tehran wants the blockade lifted before it makes concessions, and Washington wants guarantees of free passage through the Strait.
Markets started the day quietly. At 7:30am, GBP/USD opened at 1.3239, EUR/USD at 1.1382 and GBP/EUR at 1.1632, each within about a tenth of a percent of the previous day's level.
The conflict affects currencies mainly through oil. Oil sets the path for inflation, inflation sets the path for interest rates, and interest rates set where money flows.
About a fifth of the world's oil normally passes through the Strait of Hormuz. While it stays effectively closed, crude stays high. At $106 a barrel, oil is still pushing inflation up hard. That makes it difficult for central banks, including the US Federal Reserve, the Bank of England and the European Central Bank, to cut interest rates. Higher US rates, together with the dollar's role as a safe haven when geopolitical risk rises, have supported the greenback.
You can see this in the numbers. The US Dollar Index (DXY), which measures the dollar against a basket of major currencies, rose from about 98.8 at the start of September to around 101.3 by the evening of 24 September. That is close to its early-summer highs. Over the past month, GBP/USD is down 2.79% and EUR/USD is down 2.30%.
A credible path to reopening Hormuz would change that picture. Lower oil would mean less inflation pressure, more room for rate cuts and less demand for the dollar as a haven. That is why global bond yields eased slightly on the news. Until details are firmer, though, FX traders are not going to price in a peace dividend.
The main thing to watch is New York. Any concrete sign that the blockade is ending or that ships are moving through Hormuz would be the trigger for a real move.
On the data side, US durable goods orders, a measure of new orders for long-lasting manufactured goods, are due at 1:30pm UK time today. Consensus expects a small fall after last month's gain. A surprise either way would probably be a short-lived blip next to the geopolitical story.
Further out, the US midterm elections on 3 November give Washington a political reason to want lower petrol prices. Some analysts see that as a possible deadline for diplomacy. Even so, former US negotiator Dennis Ross put the chance of an agreement before the midterms at only around 30%.
For anyone with money moving across borders, the main risk right now is a sudden jump in either direction, not a steady trend.
My view is that markets are right to be sceptical. This conflict has come close to a resolution several times, and the June memorandum is a reminder of how quickly a deal on paper can fail. The phased structure makes sense because it lets each side test the other's good faith. But it also means there are several points where the talks could break down. Until the Strait is actually reopened, oil stays high, inflation stays sticky and the dollar keeps its support. Trying to predict when this ends is guesswork. What businesses can control is how exposed they are when it does.
Why is the US dollar strong right now?
The dollar has been supported by high oil prices, which keep US inflation and interest rates elevated, and by its safe-haven status during the Middle East conflict. The Dollar Index has risen about 2.5% since early September.
How would a US–Iran peace deal affect the pound?
A deal that reopens the Strait of Hormuz would probably lower oil prices and reduce demand for the dollar as a safe haven. That could help GBP/USD recover some of its recent losses, but the size and timing of any move depend on how credible the deal is.
Why does oil affect exchange rates?
Oil feeds into inflation. Inflation shapes interest-rate decisions, and interest-rate differences drive currency flows. Countries that import a lot of energy, including the UK and the eurozone, are particularly sensitive to high oil prices.
Should I wait for a peace deal before making an international payment?
Nobody can reliably predict when, or whether, a deal will happen, and prices could move sharply either way. Many businesses use forward contracts or rate alerts to manage that uncertainty rather than trying to time the market.
What are US durable goods orders?
It is a monthly US report on new orders for long-lasting manufactured goods such as machinery and aircraft. It is treated as an indicator of business investment. Today's release is not expected to move currencies significantly.
If you have currency payments or receipts coming up and want to reduce your exposure to headline-driven moves, speak to one of Caxton's FX dealers. They can take you through forward contracts, rate alerts and other ways to add certainty to your cash flow.
This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.