After President Trump addressed the nation last night to provide details on the war in the Middle East—noting that the U.S. would withdraw within two to three weeks and warning that it could “send Iran back to the Stone Age”— the markets reacted negatively, dashing, at least in the short term, the rumors from both sides regarding possible ceasefire agreements. 

While it is true that the International Atomic Energy Agency had expressed concern that it could not guarantee that 60% enriched uranium would be used for civilian purposes—given that the 2015 agreement set a maximum of 3.67%—the war is taking place during a U.S. midterm election year. 

With an electorate that is more focused on the domestic economic situation—and given Trump’s campaign promises to improve the lives of ordinary Americans—it is difficult to explain how a war thousands of miles away benefits American voters. In fact, the impact of rising fuel prices was immediate, directly affecting people’s wallets. 

Furthermore, the cost of the war is asymmetrical. On the one hand, Iran is using missiles and drones that cost between $20,000 and $250,000, while the interceptors used to neutralize them cost between $2 million and $4 million. With the U.S. having spent $11.3 billion in the first six days of the conflict, it won’t be long before the opposition raises questions, which will likely be used in the campaign, especially as polls show an increasingly tight race for Republican candidates. 

All things considered, the cost—both in terms of reputation and resources—of the military intervention must be more than offset. This is where control of the Strait of Hormuz emerges as the real prize. If Iran were to withdraw in the short term without the U.S. securing control of this strategic chokepoint, that could ultimately be interpreted as a defeat for the Trump administration. 

In this context, both international and domestic pressure could play a key role. Setting deadlines for withdrawal could lead Iranian leaders to adopt a strategy of simply holding out for a few weeks to maintain control of the strait. On the other hand, Wednesday’s announcement could be part of the U.S. leader’s rhetoric, suggesting that strategic objectives are close to being achieved, in order to calm domestic opposition and buy time. 

A risky move that, if it goes wrong—as happened with the initial expectation that the Iranian people themselves would take control following Khamenei’s eventual departure—could mean that, for Trump and his party, this military intervention will not have a happy ending. 

Gustavo Gallardo, CMT
Trading Manager, Fynsa Money Desk