Middle East Tensions Test Traders' Risk Appetite

01/08/2020 11:50 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

The Japanese yen has been the biggest FX loser of increased geopolitical tension and the Aussie and Kiwi are nearing key technical levels, writes Adam Button.

Markets absorb earlier losses from the escalation of Middle East clashes. Iran said it will no longer observe limits on uranium enrichment and Iraq signaled it will expel foreign military forces as the fallout from the Soleimani assassination threatens to further roil markets. 

The Iran-US confrontation is in a deep state of flux and is increasingly likely to show further reverberations. Iraqi parliament on Sunday voted on a resolution demanding foreign troops leave the country immediately.

In the holy city of Qom a red flag was unfurled on the Great mosque of Jamkaran in a signal of extreme alertness, but it's not clear if that's an offensive or defensive gesture. President Trump warned that the United States had identified 52 Iranian targets if Iran launches an attack on U.S. forces.

At present, it appears like a retaliation from Iran is imminent, but last year's attack on Saudi oil refinery is instructive. There remains little appetite for war, and U.S. forces wildly exceed any others in the region. Tensions can dissipate quickly.

Forex Update

The Japanese yen (JPY) is the biggest loser, lifting USDJPY to 108.30s from 107.70s, while the British pound (GBP) is the biggest gainer, following UK services PMI's return to the 50 level. US services PMI edged higher, with all eyes on the services ISM on Tuesday. Don't forget U.S. and Canada jobs this Friday.

Keep an eye on the 200-day moving averages in the Aussie dollar (AUDUSD) and New Zealand dollar (NZDUSD). We said last week, the technical breakouts above those levels reflected fierce ascent in risk appetite, coupled with broadening USD weakness. But as the latest risk aversion force high yielders lower, the 200-day moving average for AUDUSD and NZDUSD become crucial support levels at 0.6895 and 0.6520 respectively.

Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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