Currencies: Between Hopes of De-escalation and Energy Realities

Markets are navigating a pivotal phase where geopolitics dictate the tempo, while the real economy remains resilient. The conflict with Iran continues to set the tone, based on a simple equation: as long as the Strait of Hormuz remains constrained, oil remains the primary risk factor.

Diplomatic efforts are intensifying. A 15-point plan transmitted via Pakistan has opened a channel for discussion, though no formal agreement has been reached at this stage. Signals remain mixed: on one hand, concessions are emerging - particularly regarding the nuclear program - while on the other, Iranian demands over control of the Strait and compensation are stalling any rapid progress. Meanwhile, the US is continuing to deploy military personnel, ramping up pressure in a logic of "negotiation under duress."

In the markets, this uncertainty translates into persistent volatility that is becoming increasingly indifferent to political statements. Investors now demand tangible proof of a de-escalation. Recent episodes clearly demonstrate that tweets or announcements are no longer sufficient to sustainably reverse trends.

Oil remains the true barometer. A temporary retreat below $100 allowed risk assets to breathe, although  the balance remains fragile. Any sustained relapse above this threshold would immediately revive inflationary and recessionary fears. Conversely, a lasting stabilization below this level would pave the way for a more structured market rebound.

For now, the economy is resisting. Leading indicators show a slowdown, but not a contraction. US consumption remains solid, PMIs remain in expansionary territory, while corporate earnings continue to grow. Even in Europe, despite its higher exposure to the energy shock, the deterioration remains contained for the time being, notwithstanding an increased sensitivity to energy prices.

However, cracks are appearing. The rise in fertilizer prices linked to logistical disruptions highlights the broadening of the shock beyond oil alone, with a potential risk to global food supply chains. Simultaneously, central banks are beginning to price in this new regime, with some already considering a more hawkish bias in the face of returning inflationary pressures.

From a technical standpoint, the Dollar Index held firm at its 99.00 support level, coinciding with 1.1665 on the EUR/USD, suggesting a final leg up ideally toward 101.10/57 (1.1315/1.1290 on the EUR/USD). This is the level where the recovery initiated since late January should stall. Should it fail to do so, we must consider that the conflict will drag on, keeping oil prices and interest rates high, which will further weigh on equity markets.