Forex Today: Restrained US response to Iran’s attacks calms market, what next?

A sense of calm prevailed heading into early Europe after markets witnessed a significant turnaround in the risk sentiment on restrained US response to Iran’s missile attacks on US airbases in Iraq. Iran retaliated to the US killing of Quds Force leader Soleimani last Friday. Further, calls for de-escalation from both sides and US President Trump’s confirming of negligible damage/ casualties helped the risk recovery.  

In a knee-jerk reaction to Iran’s retaliatory action in early Asia, oil rallied hard to 8.5 months highs above $65.50, USD/JPY hit three-month lows at 107.64 while gold prices topped $1600 mark amid risk-off at full steam. The US dollar index gapped lower and reached lows at 96.82, as US 10-year Treasury yields dropped 10 bps alongside heavy selling in the Asian stocks and Wall Street futures. Meanwhile, the Canadian dollar picked up bids and knocked-off USD/CAD to 1.2978 lows on the oil price surge.

However, amid a likely thaw in the US-Iran geopolitical risks, in light of de-escalation hopes, a major relief was across the financial markets in Asia. USD/JPY recovered to 108.50, oil and gold prices pulled back from multi-month highs while Asian equities and S&P 500 futures clawed back losses. The risk currencies, namely, the Antipodeans turned positive, with the Aussie headed back towards the 0.69 handle.

The European currencies, on the other hand, traded flat after a brief stint to the upside. EUR/USD tested highs near 1.1170 before caving back below 1.1150 while the cable faced rejection below 1.3150 but held above the 1.31 handle. Another safe-haven in the Swiss franc jumped to five-day highs 0.9665 vs. its American rival before reversing to around 0.97 handle.

Main Topics in Asia

Risk-off as Iran retaliates, US forces in Iraq are under “missile attack from Iran”

Trump briefed on reports of attacks on Iraq air base - White House - Reuters

US Pentagon: We will take all necessary measures to protect and defend US personnel, partners, and allies in the region“

Iran’s missiles have hit American base near Erbil airport in Iraq’s Kurdistan – Reuters citing Fars

Iran: Will stop attacking if there is no response from the US, risk-recovery underway

US Defense Official: Iran fired a total of 15 ballistic missiles – ABC News

Japan’s Suga: Japan calls for nations involved to make utmost diplomatic efforts to de-escalate Mid-East tensions

US Pres. Trump: Will make a statement tomorrow (Wednesday) morning on Iran

US House Speaker Pelosi: America and world cannot afford a war

Iran's Zarif: Iran does not seek escalation or war

UAE OilMin hopes for de-escalation, says oil market well supplied

Bank Indonesia conducts triple intervention to maintain market stability, Rupiah off lows

USD/INR retraces from four-month top to 72.00 amid geopolitical plays

Key Focus Ahead       

In the face of looming US-Iran geopolitical risks, the economic releases are unlikely to have major impact on the markets, as the risk sentiment will be mainly driven by fresh developments surrounding the Mid-East tensions.

However, the EUR, GBP traders could find some impetus from the German Factory Orders, due on the cards at 0700 GMT, which are likely to rebound 0.3% MoM in November. Next of note remains a string of Eurozone Confidence gauges, dropping in at 1000 GMT. The UK docket is data-empty but the meeting scheduled between the UK PM Johnson and European Commission President von der Leyen will grab some attention among other Brexit-related headlines.

In the NA session, the US ADP Employment Change data at 1315 GMT will be closely eyed ahead of Fed’s Brainard speech and Energy Information Administration (EIA) Crude Oil Stocks Change data due at 1500 GMT and 1530 GMT respectively.  

When are the German Factory Orders and how could they affect EUR/USD?

The German data is expected to show Factory Orders rose by 0.3% MoM in November. A positive figure will likely strengthen the narrative that the German economy has bottomed out and could help EUR/USD re-test resistance at 1.1206.

GBP/USD steady above 1.3100 ahead of UK PM Johnson-EU Chief meet

GBP/USD stays well within its recent trading range above 1.3100 ahead of the London open on Wednesday. The pair showed a cold response to the early-day market action backed by the US-Iran war fears, as traders await details of the UK-EU leaders’ meet.

The path of no return?

We could start to see the forward buys exert more influence on gold spot prices as the deterioration in the US -Iran relationship intensifies.

US ADP Employment Change Preview: Labor market expansion is steady

US Private payrolls expected to revert to trend in December. Two weak months, September and November have not carried through to NFP.