Middle East War updates: Trump holds off Iran strikes on pledge Hormuz deal is close

Lallalit Srijandorn FXStreet

Here’s a brief recap of the key developments in the Middle East war that occurred over the weekend, which are expected to have a significant impact on markets in the upcoming week.

US President Donald Trump said that he’s holding off delivering new strikes on Iran on the basis of “rapidly” reaching a deal on its nuclear programme and the full reopening of the Strait of Hormuz.
“Based on this request, I have agreed, for the future benefit of the WORLD and, likewise, the survival of a successful and prosperous Iran, to cancel the attack, subject to being able to rapidly make a DEAL,” said Trump
Iranian Foreign Minister Abbas Araghchi stated on Sunday on Telegram that talks between Iran and Oman are in the final stages. The two countries that flank the strait are discussing a new route through it, but the negotiations don’t cover whether the critical waterway will be closed or open.
Iran's semi-official Mehr news agency denied that Tehran had asked Washington to hold off on further military action, saying Trump's claims were "nothing but a new lie".
Axios reported on Sunday that Saudi Arabian Crown Prince Mohammed bin Salman urged Trump to refrain from fresh strikes. The official Saudi news agency said the kingdom’s de facto ruler had stressed to Trump the need for dialog to deescalate tensions.
Trump said negotiations with Iran, likely via intermediaries, will begin on Monday, adding that talks with Saudi Arabia, the UAE, Qatar and Iran prompted him to call off what would have been a “massive attack” on Friday. He added that there may be a deal on managing the Strait of Hormuz and that there will be a deal on denuclearisation in Iran.

Market implications

Risk sentiment improves on Monday, undermining demand for the US Dollar Index (DXY) and drag crude oil prices lower. At the time of writing, the DXY is down 0.11% on the day at 99.70.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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