FX Daily: War Is Over – Maybe

“We ended the war with Iran today,” said President Trump yesterday evening. Brent crude fell 4% on the news, while short-dated US yields and the dollar fell 10bp and 0.8% respectively, and US equities jumped 1.5%. We have been here before, where an imminent peace deal touted by the White House has failed to materialise. Let's see what Iran has to say.

USD: Peace deal may be close, legacy is a stronger dollar

Financial markets reacted with predictable optimism to news that another US-Iran peace deal may be imminent. Many investors are taking their cue from the oil market, where the surprising softness in energy prices over recent weeks has many guessing that oil traders have the inside track on peace negotiations. Who knows for sure, but it does seem that some progress is being made towards a new 60-day deal where the Strait of Hormuz would be opened, and Iran would be able to sell its oil.

Whether the Iranians want to hold out for better terms remains to be seen. So far, Iranian sources have yet to confirm agreement with the text in any Memorandum of Understanding. And the dollar has already retraced about a third of yesterday's losses.

For today, the market will again be headline-driven. Will Vice President JD Vance be getting on a plane to Europe to sign some kind of agreement? And more importantly, will we receive confirmation from Iran that it is happy with a deal and will also be sending a delegation to Europe this weekend? Expect the dollar to be bounced around today on the ebb and flow of these headlines.

But the legacy issue of this crisis has been the substantial loss of energy supplies and its inflationary shock sent around the world. Unless oil starts shipping freely in the Strait of Hormuz very soon, our house call is that energy markets could move close to a tipping point in July. In turn, we would be wary about expecting much lower oil prices from current levels.

With the fallout from the oil shock coming at a time of stable to positive US jobs numbers, investors are still wary of how the Fed will react. Short-dated US rates have come lower, but the market still prices 20bp of Fed tightening this year. It is hard to see that being unwound ahead of next Wednesday's FOMC meeting, where a new-look statement and a new set of forecasts could prove dollar supportive. In short, we do not think the dollar needs to sell off too much further, even if there is good news out of the Gulf today.

On today's US data calendar is the Michigan Consumer Sentiment. That is expected to remain weak. Also, look out for the 5-10 year inflation expectations reading. These jumped to 3.9% in May and are expected to be a little lower at 3.8% today. And of course, there will be much focus on SpaceX's debut on Nasdaq. It was priced at $135 per share, and derivatives markets are pointing to a potential +35% open. An Iranian peace deal would be well-timed.

DXY has been holding up quite well despite a hawkish ECB and a potential ceasefire in the Gulf. We expect it to find continued support near 99.50.

EUR: Hawkish ECB fails to lift EUR/USD over 1.16

Yesterday's ECB meeting was perceived as hawkish, and we have already started to receive many ECB source stories of another possible rate hike in July. The problem for the euro yesterday was that the market was already pricing in quite an aggressive ECB tightening cycle of 75bp over the next nine months, and investors do not want to push that pricing any further. After all, the ECB is reacting to a stagflationary supply shock.

EUR/USD had been close to pressing support at 1.1500 before President Trump's intervention last night. But equally, we are still trading under 1.1600. This probably reflects the fact that the Fed's tightening genie has been released from the bottle, and unless we receive a surprisingly neutral/dovish set of communications from the Fed next Wednesday, the dollar should stay supported. In short, the Fed looks to be a bigger story than the ECB.

1.1585/1600 could prove the top of the day's range again, and it would probably take a close above 1.1650 to unwind the recent optimism on the dollar.

TRY: CBT and the market are waiting for the end of the US-Iran conflict

The Central Bank of Turkey maintained its policy rate (1-week repo rate) at 37% and kept the interest rate corridor stable at 450 basis points, with the upper and lower bands remaining at 40% and 35.5%, respectively. We think the CBT has continued to keep an eye on both the growth and inflation outlook; the bank acknowledged that first-quarter GDP points to a slowdown in economic activity (to 0.1% quarter-on-quarter and 2.5% year-on-year), while recent leading indicators imply continued domestic demand weakness.

The CBT also acknowledged the slight decline in underlying inflation in May, while emphasising ongoing risks to the outlook on the back of geopolitical developments and high and volatile energy prices. So, the bank has remained cautious and “highly attentive to upside risks” given that the war has driven an upward shift in inflation expectations.

Overall, all policy options are still available to the CBT. In the near term, we think it will remain in wait‑and‑see mode before deciding whether to reduce the effective cost of funding back towards the policy rate. Currently, we see end-year inflation slightly below 30% and the one-week repo rate at 35%, with risks tilted to the upside.

The market saw little reaction to the CBT meeting and also remains in wait-and-see mode. With the central bank clearly taking the same approach, both sides now await progress in the US-Iran conflict, which significantly affects the CBT's reaction function. The market is only pricing in a return of the effective rate to the policy rate this year, but otherwise, the key rate should remain unchanged for a little longer than our forecast suggests (4Q26). FX also remains untouched, and USD/TRY continues on a steady upward trajectory.

CEE: Risk-on mood helps the region erase previous losses

Yesterday's headlines about a possible end to the US-Iran conflict quickly switched the market back into risk-on mode, with CEE currencies benefiting before the end of trading. The zloty erased previous losses after touching the upper edge of the current 4.225-260 range. EUR/HUF tested new lows below 354, and a positive mood can be expected at today's opening. EUR/USD returned above 1.155, which should help CEE currencies to gain and reverse some losses from the previous days. From the perspective of oil prices at this moment, it seems that the current decline is not enough to change central banks' thinking. The genie is already out of the bottle, and the impact on inflation is already visible.

The Czech National Bank is likely already determined to hike rates next week, in our opinion, and even a quick end to the US-Iran conflict would not change this. Governor Ales Michl mentioned in today's interview that the June hike is live, and we may hear more in his TV interview later today.

The National Bank of Hungary may be a different story, and while a 25bp rate cut in two weeks is our baseline, a 50bp move cannot be ruled out. If we were to see a quick rally in the forint closer to 350 per euro in the post-conflict positive mood, it could change the NBH's thinking and speed up easing. However, at this point, the market will instead look for confirmation of yesterday's headlines and consider whether this is just short-term relief.