Euro-Dollar Faces Crucial 24 Hours

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The euro-dollar exchange rate is looking to record a second consecutive daily advance, but we don't think it will get very far owing to the complicated geopolitical backdrop.

The pair is at 1.156 on Tuesday, which puts it approximately in the middle of its Iran war range: 1.1650 is at the top and 1.14 at the bottom.

The range has become increasingly narrow as the war has progressed and the chart shows a wedge pattern forming. That usually happens before a more concerted breakout occurs.

Such a breakout could occur in the coming hours as America's deadline on Iran to reopen the Strait of Hormuz approaches.

Escalation or hints of a ceasefire are both possible; both offer significant binary outcomes for euro-dollar. Those with payments should consider engaging a payment specialist to consider setting up orders and strategies to mitigage risk and take advantage of any helpful market reactions),

Breakouts are a response to specific triggers, and we can't say what the trigger will be or when it will happen.

But until that moment happens euro-dollar should be centred on 1.15, which looks to be the pair's Iran conflict equilibrium point. 

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The coming 24 hours should be interesting in this regard: U.S. President Donald Trump's deadline on Iran to reopen the Strait of Hormuz expires at 1 AM BST.

Iran has rejected the demand and Trump says he will bomb the country back into "the stone age" by bombing civilian infrastructure.

There are significant downside risks for the euro if Trump follows through with his threats, as it risks retaliation against commercial shipping in the Strait of Hormuz and a prolonged closure.

The other risk is that Iran and the U.S. agree on some kind of ceasefire and tensions unwind further, helping the euro recover to 1.1650.

There's also a third way: if Trump doesn't get the concessions he needs, he might yet find a way out of bombing bridges and power stations, as he has proven very reluctant to go after civilian infrastructure. This would involve a social media post saying he has cancelled plans to proceed as the Iranian's are talking and are keen to 'make a deal'.

If so, the status quo persists for longer as this draws the process out and opens the door to yet another deadline.

Here, a continuation of euro-dollar at around 1.15 looks like a good bet.

Of course, the risks are that elevated oil and gas prices reignite USD gains, pushing euro-dollar to crisis lows at 1.1410.