At 7pm London time tonight, President Trump will announce his decision regarding the 2015 “Iran Deal”: whether to formally withdraw from the agreement, and whether to reimpose U.S. economic sanctions against Iran. The self-imposed deadline was originally set to expire at the end of this week but has been brought forward a few days for reasons which remain unclear.
If President Trump does, as is widely expected, announce that he has decided to withdraw from the agreement, he still has room for maneuver – whether it is a “hard” or “soft” exit will depend upon both whether he reimposes sanctions on Iran, and how far he will take enforcement measures.
There has been a lot of speculation over whether the President’s decision may be a catalyst for war or more limited military conflict to break out in the Middle East. However, markets are calm, and if there were a strong fear of imminent war, we could expect Crude Oil and stocks to be subject to sudden sharp falls, with a lot of generally wild volatility everywhere. So far at least, this is not happening in the market.
A more realistic prospect might be a clash in the Eastern Mediterranean between Israel and Hezbollah and/or Iranian forces in either Lebanon or Syria, or possibly both. Iran has promised an attack on Israel and Israel has threatened to attack Iran directly if certain red lines are crossed. Analysts believe the most likely scenario will be an attack on an Israeli military target from Syria, which might invite only a relatively limited Israeli reaction.
Opinion seems to be divided among Iranian decision markers as to how Iran will respond to any change in the status quo which President Trump might initiate. The other states which were signatories to the 2015 JCPOA deal – the U.K., France, China, Russia, and Germany, have indicated they will keep to the deal and the majority opinion in Iran seems to be to keep to the deal also, regardless of what the U.S.A. does. President Trump wants to amend the deal, but this looks very unlikely to happen – it would be a major, huge climbdown by Iran if they were to announce they had agreed to accept U.S. amendments to the agreement.
There are two things to watch out for tonight. Firstly, the surprise scenario could be an announcement by Trump that the U.S. is reluctantly staying in the deal or is withdrawing but will not enforce any sanctions against Iran. If either of these scenarios were to play out, we might see a sharp fall in the price of Crude Oil, and possibly also a general recovery of more risky assets against the U.S. Dollar and Japanese Yen such as stocks and commodity currencies. The second scenario to watch for would be a withdrawal and an intention to enforce sanctions, followed in the next hours by a military clash in the eastern Mediterranean. This could cause a sharp spike in the U.S. Dollar, the Japanese Yen, Gold and Crude Oil, especially if the clash takes on any unexpectedly wide dimension.