by Lukman Otunuga, Research Analyst at FXTM
In a move that dealt a painful blow to global sentiment, President Donald Trump declared on Tuesday that the United States will be pulling out of the “defective” Iran nuclear deal.
U.S stocks ended mixed on the news while oil prices fluctuated in each direction, as investors considered the potential negative ramifications of Trump’s decision. The U.S President adopted a very aggressive rhetoric during the announcement and failed to hold back from his view that the 2015 agreement was “defective” at its core.
While it was widely anticipated that Trump would pull out of the Iran agreement, what is likely to leave a lasting impact on the markets is the threat that he would also penalize those who help Iran. These overall risks are encouraging traders to price in some new geopolitical risk premium, and his threat can potentially be seen as a blow for U.S allies.
There is a threat of Trump’s stark tone questioning U.S relations with its European allies, especially given that the likes of France and the United Kingdom had appealed for Trump not to withdraw.
It should also be noted that both China and Russia are also part of the 2015 Iran nuclear agreement. Relations between Trump and both these nations have been questionable in recent weeks.
What this all likely means to the financial markets is that anxiety could be heightened over a new round of geopolitical tensions. This will not have been helped by Iran immediately stating that it was preparing to restart uranium enrichment, which is key for making nuclear weapons.
The prospect of heightened geopolitical tensions in the Middle East following Trump’s departure from the nuclear deal is seen as encouragement for risk aversion. A risk-off environment is likely to attract the flight to safety mindset
from traders, where both Gold and the Japanese Yen would be seen as potential beneficiaries.
South African Rand under pressure
The South African Rand was vulnerable to losses on Wednesday morning as the Dollar Index rallied to a fresh 2018 high. With the Dollar heavily supported by rising US Treasury yields and expectations of higher US interest rates, emerging market currencies including the Rand could feel the heat. Taking a look at the technical picture, the USDZAR has scope to challenge 12.77 in the near term if bulls are able to conquer the 12.73 level.
Dollar jumps to fresh 2018 highs
It is shaping up to be another heavily bullish week for the Dollar, which has sprinted above 93.25, its highest level this year against a basket of major currencies.
Thanks to a hawkish Federal Reserve, interest rate differentials are moving in favour of the Dollar. Price action suggests that bulls are back in town, with further upside on the cards amid growing expectations of higher U.S interest rates. Taking a look at the technical picture, the Dollar Index remains firmly bullish on the daily charts. A decisive breakout and daily close above 93.00 could encourage an incline higher towards 93.50.
Commodity spotlight – WTI Crude
Oil bulls entered the scene on Wednesday morning after Trump deserted the Iran nuclear deal. WTI Crude has scope to venture higher in the near term, as fears of heightened geopolitical tensions in the Middle East fuel concerns of potential supply disruptions.
Taking a look at the technical picture, WTI Crude remains firmly bullish on the daily charts. There have been consistently higher highs and higher lows while the MACD trades to the upside. A solid daily close above the $70.00 level could invite an incline higher towards $71.10. Alternatively, if bulls are unable to keep prices above $70.00, the next key level of interest will be at $69.30.
Gold punished by strengthening Dollar
An aggressively appreciating U.S Dollar is likely to continue punishing Gold this week.
Although the yellow metal was initially boosted by market jitters following Donald Trump’s Iran announcement, gains were later capped by a strengthening Dollar. Gold remains vulnerable to downside losses, especially when considering how Dollar strength remains a dominant market theme.
Taking a look at the technical picture, previous support around $1324 could transform into a dynamic resistance that encourages a decline towards the psychological $1300 support level.