Credit Agricole CIB Research discusses the FX market outlook in lights of the latest developments of US-Iran conflict.

"Investors have been preoccupied with trying to time the end of the US-Iran conflict ever since the ceasefire between the two was announced in early April. Recent media reports have suggested that a memorandum of understanding has been agreed but its approval by the US (and Iranian) leaders remains uncertain. Our assumption is still that the standoff would ultimately be 'frozen', with the ceasefire period extended to accommodate future negotiations over Iran's nuclear programme and the Strait of Hormuz (partially) reopened. We further continue to see September as a 'hard deadline' of sorts," CACIB notes.

"As a result, we expect global energy costs to ease somewhat but remain above their pre-war lows. While this may help contain inflation risks, the risk of energy demand destruction and thus a negative economic shock could grow. In FX, the above developments could mean that in H226 investors may start to shift their focus from nominal rate spreads (a proxy for relative central bank outlook) to real rate spreads (a proxy for relative growth outlook). The USD is trading at a discount relative to its relative real rate appeal and could recover in coming months," CACIB adds.