21.10.202613:34 Forex Analysis & Reviews: Market believes US–Iran conflict is being resolved

Yesterday, the dollar weakened sharply after reports that a proposal presented by Pakistan's army chief to senior Iranian officials had received US approval and Iran's preliminary consent, according to Israel's Channel 12. Following the report, the euro and pound rallied, oil retreated from five-month highs, and risk appetite rose. The FX market again showed that geopolitics, not statistics, remains the primary driver.

If the report is accurate, the proposal partially meets Iran's demand to release frozen funds. It envisages that interest on $6bn of Iranian assets frozen in Qatari banks would be transferred to Iran. For Tehran this would be a concession on a key issue, while for the US it could be a way to show the deal does not amount to full sanctions relief.

The market, however, believed in a quick resolution too fast. Negotiations aimed at ending the US–Iran confrontation are indeed under way, but a diplomat involved in talks said yesterday reports of an imminent agreement were untrue.

To gauge the scale of expectations, recall the backdrop. On the eve of the reports, Iran's first vice president, Mohammad Reza Aref, spoke of the need to control the Strait of Hormuz; Brent traded near $110, WTI near $99, and US energy secretary Chris Wright estimated flows from the Gulf at roughly 80% of pre-war levels. Expensive oil pushed inflation and strengthened Fed tightening expectations, which in turn lifted yields and dollar demand. Any hint of de-escalation reverses that chain and removes dollar support, hence the sharp reaction.

Weak US data added to the pressure. Housing starts in September fell 5.2% year-on-year to 1.221m versus a 1.300m forecast and 1.288m a month earlier—the weakest four-month result and worse than all estimates. Single-family starts fell to a one-year low. Building permits were 1,400 m versus a 1,390 m forecast and 1,403 m in August, but single family permits dropped to the lowest level since early 2023.

Even tougher was the existing home market. The pending home sales index in September plunged 7.3% to 66 versus a 0.5% decline forecast and a 0.3% rise a month earlier—the lowest reading since the series began in 2001. On a non-seasonally adjusted basis, closings fell nearly 13% year-on-year. The culprit is expensive mortgages: rates have risen since the Iran war began and are at near-three-year highs, so the conflict is hitting US housing. The labor market added a negative note: ADP October payrolls rose 18.5k versus 26.0k the week before, showing a slowdown in hiring.

For the euro and pound, the day was mixed. EUR first fell on weak German and euro area data, while GBP rose on UK unemployment numbers. News of a possible settlement later lifted both currencies, and the headline became the main driver.

I lean toward the view that while the agreement remains unconfirmed, the dollar will swing with the news. If the US and Iran do move toward a deal, oil could drop further, and the dollar could continue to weaken, while the euro and pound may have scope to rally. But if the diplomat's denial proves accurate, markets will quickly return to dollar demand, and renewed high oil prices will push back hopes of easing pressure.

Technical picture for EUR/USD

Buyers now need to think about reclaiming 1.1260. Only that would allow targeting a test of 1.1299. From there one can reach 1.1335, but doing so without support from large players will be difficult. On the downside, I expect serious buying only around 1.1220. If nobody shows up there, it would be sensible to wait for a new low near 1.1190 or to open longs from 1.1155.

Technical picture for GBP/USD

Pound buyers need to take the nearest resistance at 1.3402. Only that would allow targeting 1.3440, above which further gains will be hard. The far target is the 1.3465 area. On a decline, bears will try to seize control of 1.3365. If they succeed, a break of the range would hit bulls hard and push GBP/USD to a low near 1.3335 with scope to reach 1.3300.