Unrest surrounding Iran puts oil, interest rates, and the dollar under pressure.

The inconsistent reporting from the White House regarding the conflict in Iran is causing significant movements in financial markets. The oil price, in particular, is fluctuating heavily, with direct consequences for inflation, interest rate expectations, and the dollar exchange rate.

One moment, US President Donald Trump says that talks with Iran are going well, but moments later he threatens to attack the country's energy and desalination infrastructure. The contradictory messaging from the White House has various repercussions in the financial world. In this regard, the oil price is the best barometer of how traders view the course of the conflict.

A barrel of Brent crude has become more than half as expensive since the end of February, but there were also several days last month when black gold dropped by 10% in a single fell swoop. On currency markets, attention is primarily focused on the dollar, but here too, the oil price plays an increasingly significant indirect role.

Oil crash hits US hard
In this context, everything revolves around the question of how the high price at the pump impacts the economy. In the Netherlands, the cabinet is under increasing pressure to compensate for high gasoline prices. But in the United States, the blow is felt even more severely. Because excise duties and surcharges are significantly lower than in Europe, fluctuations in oil prices weigh more heavily on the prices of gasoline, diesel, and other fuels. Pump prices have risen approximately twice as fast as in our country. If this is a temporary effect, it will not be felt as strongly in the wallets of the average consumer and the American business community. However, if oil prices remain high for an extended period, it bodes ill for the US economy.

40.000 extra jobs. Or maybe not?
Although the direction of the oil price is primarily determined by developments in Iran and the White House, the eyes of the currency world will be focused tomorrow on the figures released by the American ADP. This company handles payroll administration and payments for a large part of the business community. The figures are expected to indicate that approximately 40.000 jobs were added in March. If actual job growth turns out to be lower, concerns about the US labor market will increase. In that case, pressure will mount on the Federal Reserve to lower the policy interest rate somewhat, despite rising inflation, in order to give the economy some breathing room. Falling interest rates are usually unfavorable for the dollar.

Shaky price movement
Despite rather volatile price movements, the US dollar has nevertheless gained ground on the euro over the past month. Europe is grappling with the same problems and, moreover, faces the additional challenge of being dependent on foreign imports for oil and natural gas. Besides the Western economy, the oil market has, in a sense, also held the currency world in a stranglehold. In the long term, the most likely scenario is that the interest rate differential between the United States and Europe will narrow somewhat. This would give the euro a slight edge. However, as long as there is no prospect of an end to the conflict in Iran and a proper passage through the Strait of Hormuz for shipping traffic, currency markets are drifting along with Trump's mood.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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