investingLive Americas FX news wrap 25 May: Diplomacy hopes hit oil, lift risk

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With London and U.S. markets closed for the holiday, trading activity was lighter across the major stock indices and debt markets. As a result, the primary focus for investors shifted squarely toward developments surrounding the conflict in Iran and the ongoing diplomatic efforts aimed at preventing a broader regional escalation.

Both sides acknowledged that significant work still remains, but there appears to be growing hope that negotiators can at least agree to a preliminary Memorandum of Agreement (MOA) that would serve as a framework and starting point for more detailed negotiations down the road. The reported discussions include several key elements:

  • A proposed 60-day ceasefire or pause in hostilities to allow negotiations to continue.
  • Reopening the Strait of Hormuz, including efforts to clear mines and restore normal shipping traffic.
  • Potential easing of U.S. restrictions on Iranian ports and limited sanctions waivers.
  • Temporary permission for Iran to resume some oil exports.
  • Continued negotiations over Iran’s enriched uranium stockpile, which remains the biggest sticking point.
  • Possible access to frozen Iranian funds, although the U.S. continues to push for nuclear concessions first.
  • Discussions that may also include the Israel/Lebanon front, with Iran reportedly seeking a broader regional de-escalation.

Importantly, there is still no final agreement in place. Iranian officials acknowledged that progress has been made, but they also cautioned that a deal is not imminent. For markets, however, even the possibility of diplomacy was enough to reduce some of the immediate war-risk premium that had been built into oil prices over recent weeks.

That said, the major unresolved issues remain substantial — uranium enrichment, sanctions relief, frozen assets, the Israel/Lebanon conflict, and perhaps most importantly, trust between the parties. In many ways, trust may be the hardest issue to repair once the cycle of escalation and retaliation has taken hold.

One of the largest risks to the diplomatic effort may come from renewed hostilities between Israel and Hezbollah in Lebanon. Reports surfaced that a senior Israeli official said Israel has decided to launch a major strike against Hezbollah targets in Lebanon. Just as hopes begin to build for de-escalation, the threat of renewed military action quickly reminds traders how fragile the situation remains.

Even so, the oil market gave the diplomatic effort at least a partial “benefit of the doubt.” Crude oil prices moved sharply lower on the day, with the price currently trading down $6.30 or -6.52% at $90.30. The low price reached $89.41, while the high extended to $93.90 earlier in the session. If selling momentum continues, traders will next target the May low near $88.66.

The sharp decline in oil prices also helped pressure the U.S. dollar lower against most of the major currencies as safe-haven flows moderated somewhat. Looking at the greenback versus the major currencies:

  • EURUSD: USD -0.34%
  • USDJPY: USD -0.18%
  • GBPUSD: USD -0.56%
  • USDCHF: USD -0.28%
  • USDCAD: USD -0.12%
  • AUDUSD: USD -0.69%
  • NZDUSD: USD -0.38%

Although the major U.S. stock indices were closed for the Memorial Day holiday, S&P 500 e-mini futures still traded and moved higher by 0.98%, reflecting some improvement in overall market sentiment.

In other markets, precious metals benefited from the weaker dollar backdrop. Gold rose $61.89 or 1.37% to $4,570.82, while silver surged $2.57 or 3.42% to $78.05. Meanwhile, Bitcoin also moved higher, gaining $550 or 0.71% to trade at $77,523.

This article was written by Greg Michalowski at investinglive.com.

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