Three scenarios for Trump’s statement on Iran – and potential currency reactions
- President Trump may shrug off Iran’s missile attack, providing tentative calm in some assets.
- A vow to retaliate may trigger a full risk-off reaction.
- An offer to talk may trigger a market rally.
It took Iran five days – to the minute – to retaliate to the US killing of Qassem Suleimani, a top Iranian general official. Tehran fired missiles on two US bases in Iraq, claiming that 80 people were killed. However, the Pentagon did not report any casualties and President Donald Trump tweeted “all is well.”
Markets have bounced back from the initial fall but tension remains elevated as the president is set to address the nation on recent Mid-East developments.
Here are three scenarios for Trump’s statement, and how it may impact currencies and gold:
1) Shrugging off Iran’s response
The president may follow through on his tweet, announcing that the damage was minimal, and mocking Iran’s capabilities. That would imply that the US has no plans to hit back and allow for some calm in markets.
Trump previously vowed to finish the endless wars in the Middle East and faces a tough reelection battle. He also measures his success via stock markets.
The safe-haven dollar and yen would retreat in this scenario while stocks and commodity currencies would have room to rise.
However, uncertainty about the next developments in the region may allow gold bulls to keep the precious metal bid. It is essential to note that XAU/USD has been enjoying a steady uptrend well before the Iran-inspired rally.
The probability is high according to the current knowledge of minimal damage.
2) Vowing to hit Iran hard
Trump also promised to inflict damage on Iran – including on cultural sites – in case it responds to Suleimani’s killing and may feel obliged to follow through if US servicemen were killed. A pledge of “fire and fury” may lead to speculation of a troop surge and rising chances of outright war.
In this scenario, the safe-haven dollar, yen – and perhaps also the Swiss franc – may find demand. Gold would have room to rally well beyond the $1,600 mark and oil prices could enter a more consistent uptrend than the recent back-and-worth moves.
The losers would be stock markets and also the Australian and New Zealand dollars. The C$ may gain with petrol prices.
The probability is medium and it depends on the damage.
3) Time to talk?
Iran said it does not seek war nor escalation and Trump also fears the Middle Eastern quagmire. Both sides may claim to their domestic audiences that they won this round and ready to talk.
The president already tore down the North American Free Trade Agreement (NAFTA) only to reconstruct a similar accord but with a new name – the US Mexico Canada agreement. After ripping up the Iran nuclear deal (the JCPOA) he may take ownership of a new process with Tehran, beginning a new round of negotiations.
Iran may even achieve its goal of kicking the US out of the region – while Trump declares victory and an end to needless wars.
If the message is somewhat conciliatory, stock markets may rally and safe-haven assets will be sold off. That includes the dollar, yen and also Gold. Oil prices could also settle at lower ground.
The probability is low, as Trump may find it hard to offer an olive branch.
The most likely scenario is for Trump to dismiss Iran’s attack, allowing for a relief rally, but no sell-off in gold. Another option is a pledge to fight back, triggering an all-out risk-off rally. The president may also call it even and suggest new talks and trigger a massive rally – but chances are slim.