Markets hold steady as geopolitical risks build

Market overview

FX markets remain orderly despite renewed geopolitical tension, with investors resisting a broad shift into defensive positioning. Volatility remains well below the peaks recorded earlier this year, limiting demand for traditional safe havens and allowing carry-driven strategies to remain influential.

Oil prices continue to shape rate expectations, particularly in Europe, where economies are more exposed to imported energy costs. Higher crude prices may encourage more hawkish central bank pricing, but any sharper deterioration in risk sentiment would likely favour the dollar and weigh on European currencies.

With major central banks approaching communications blackout periods and month-end policy meetings drawing closer, consolidation may dominate unless geopolitical developments force a decisive repricing.

USD: Momentum fades as Fed support softens

The US Dollar Index has retreated from its 24 June high of 101.800, with softer inflation data accelerating the decline. DXY has moved below its 21-day moving average near 101.000, although the broader recovery from May’s lows remains intact. Support at 100.20 to 100.10 is now the key technical area.

The dollar has received limited support from geopolitical uncertainty, reflecting subdued volatility and the absence of widespread market stress. At the same time, other G10 rate markets have adopted a more hawkish tone as higher oil prices revive inflation concerns, reducing the dollar’s relative yield advantage.

US rates still price one further increase this year, but policymakers have offered little fresh encouragement for dollar bulls. With the Federal Reserve entering its blackout period, DXY is likely to remain contained between 100 and 101 ahead of the 29 July meeting, provided tensions in the Middle East do not escalate materially.

GBP: Carry appeal meets rising complacency

Sterling remains one of the strongest-performing G10 currencies over the past month, supported by attractive yields, resilient UK data and easing fiscal concerns. Demand has been particularly visible against the euro, where GBP/EUR briefly pushed towards 1.18 after breaking above its previous one-year range.

The pound has also benefited from exceptionally low FX volatility, which has increased its appeal as a carry currency. Expectations that the next government may adopt a more disciplined fiscal stance have added to the positive backdrop.

However, much of the favourable news may already be reflected in current pricing. Three-month sterling volatility near 6% appears low given the political transition and the unresolved structural pressures on the public finances. GBP/EUR also looks stretched relative to short-term rate differentials, suggesting further gains may become harder to sustain.

Sterling therefore remains well supported, but increasingly exposed to any rise in volatility, renewed geopolitical stress or closer scrutiny of the UK’s fiscal outlook. The Autumn Budget is likely to become a major test for investor confidence.

EUR: Oil support balanced by risk sensitivity

EUR/USD is likely to struggle for clear direction as both the European Central Bank and Federal Reserve move into their communications blackout periods. Consolidation around 1.14 remains the most likely near-term outcome.

Higher oil prices present a mixed picture for the euro. They may keep ECB rate expectations firmer by raising inflation risks, but they also weaken the eurozone’s terms of trade by increasing the cost of imported energy.

Risk sentiment remains the more important factor. The euro has historically shown greater sensitivity to geopolitical shocks because of concerns over regional growth and Europe’s exposure to energy supply disruption. A broader move into defensive positioning would likely outweigh any support from more hawkish ECB pricing.

Unless the US-Iran conflict becomes more prolonged or disruptive, EUR/USD may remain range-bound into the month-end central bank meetings.

Looking ahead

• US dollar support at 100.20 to 100.10 remains the key level for DXY.

• Geopolitical developments and oil prices will continue to drive short-term rate expectations.

• UK labour market data, inflation, retail sales and flash PMIs will test sterling’s recent strength.

• GBP/EUR may struggle to extend gains without further support from rate differentials.

• EUR/USD is likely to consolidate near 1.14 ahead of the ECB and Fed meetings.