Yesterday’s reports, which seemed to suggest that peace in the Middle East was drawing closer, once again turned out to be an illusion. Both the fighting and the war of words are continuing, prompting investors to retreat from Wednesday’s risk-on mood. Central bankers remain deeply concerned about inflation, while the Monetary Policy Council left the cost of money unchanged in April.
Fiction chasing fiction
As recently as yesterday, the media was reporting encouraging news of a two-week ceasefire in the Middle East. Investors reacted with enthusiasm and increased their exposure to risk. Today, however, the emotional moves seen during yesterday’s session are being reassessed much more soberly.
Referring back to Wednesday’s currency commentary, which mentioned, among other things, Israel’s stance on the ceasefire not covering Lebanese territory, it was difficult not to expect a rapid escalation of the conflict. A few hours later, the largest shelling of that country since the start of this war took place. Iran, in turn, did not remain passive and continued its drone attacks on neighboring countries.
There is therefore no real ceasefire, although the media is now describing these events as its collapse. The fighting is still ongoing, and the parties remain unable to reach an agreement. Moreover, yesterday’s reports about Friday peace talks in Pakistan’s capital turned out to be inaccurate, as the negotiations are in fact scheduled for Saturday.
The pace of developments is now so intense that it almost feels absurd. One could imagine a scenario in which one side decides on Saturday morning to move the talks to a completely different location, only to later claim that the other side failed to show up and is therefore responsible for the lack of a truce. In such a chaotic and irrational environment, it is difficult to expect anything other than a return of capital to safe-haven assets. This is all the more true given that the US president once again made unfavorable remarks yesterday about the NATO alliance.
Cooling market optimism
The return of fear to the markets is visible even without reading the headlines. Oil prices are rebounding, aiming to return to the round level of USD 100 per barrel. It is worth recalling that yesterday’s low stood at USD 91 for the American benchmark and USD 90.5 for the London benchmark. Today, by 1:30 p.m., WTI had climbed to USD 99.6, while Brent rose to USD 98.7.
This is linked both to lingering fear and to the continued disruption of shipping through the Strait of Hormuz. In the foreign exchange market, the US dollar strengthened. The world’s main currency pair fell below 1.17. At the time of writing, EUR/USD stands at 1.168, while yesterday evening it was testing support around 1.165.
Rising risk also weighed on the Polish zloty, which gave back part of Wednesday’s gains in the morning. By the afternoon, however, there were signs of renewed strengthening. At 1:30 p.m., EUR/PLN was attempting to move below PLN 4.26, while USD/PLN was trying to fall under PLN 3.65.
Thursday’s trading thus represents a partial reversal of yesterday’s moves, although the de-escalation narrative is preventing the charts from returning to the levels seen before the reports of a two-week ceasefire. This suggests that markets still believe in the possibility of a lasting agreement and a gradual easing of the conflict.
Central bankers remain concerned
Yesterday’s minutes from the March FOMC meeting showed two opposing views regarding the same effects of the conflict in the Middle East. Higher fuel prices are expected to be both inflationary and harmful to economic activity, while also putting pressure on employment.
US policymakers are once again divided over whether they should raise borrowing costs to curb price growth or cut rates to protect the labor market. The lack of a clear answer naturally points toward a wait-and-see approach. This is also reflected in analysts’ forecasts, which suggest that the Federal Reserve is unlikely to change interest rates before the end of the year.
Today and tomorrow, markets will receive a full batch of data from the US economy. These readings will probably not provide definitive answers to the key questions currently troubling investors, but they may help indicate the direction of further changes in the world’s largest economy.
Today’s macroeconomic calendar also included a Polish element. As expected, the Monetary Policy Council kept the reference rate unchanged at 3.75%. The decision did not have any major impact on the performance of the domestic currency.
