While the 'ceasefire' between Israel and Iran declared by President Trump yesterday looks fragile—Israel is reportedly ordering a new strike on Iran after an alleged breach of the truce—markets continue to trade as if the conflict is over. Crude oil, which traded as high as $78.50 yesterday, is off earlier session lows but is still down some 14-15% from Monday’s high, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD weakens, crude plunges and stocks rebound on 'ceasefire'

"Global stocks are strengthening, bonds have eased— although Treasurys are steady to slightly firmer—and the USD is trading sharply lower across the board. Recent underperformers—the JPY, AUD and NZD—are outperforming on the day. The CAD and NOK are firmer versus the USD but sit at the foot of the overnight performance table. Markets reason that yesterday’s weak retaliation by Iran for the US attack on it nuclear facilities reflected either very diminished or limited capabilities or represented a deliberately weak response.

"Either way, investors appear confident that the uncertainty created by the situation over the past couple of weeks is likely to recede as both parties reduce military posturing. After concentrating his attention on the Middle East, President Trump is refocusing on domestic issues, repeating his criticism of 'too late' Fed Chair Powell ahead of his congressional appearance today, hoping lawmakers 'really work over' the chair. Powell is one of half a dozen or so Fed officials speaking today. His testimony is unlikely to shift from the cautious outlook for policy amid ongoing uncertainty over the impact of tariffs, despite the president’s comments."

"Atlanta Fed President Bostick commented that there was “no rush” to ease policy in a Reuters interview this morning. On the charts, hefty USD losses yesterday and additional weakness today is likely to stoke up bearish momentum in the USD again after last week’s brief consolidation. Key support is 97.60 for the DXY now while resistance is 98.25/35. We still think broader risks point towards a slide in the DXY to the 90-95 range in the coming months."