Market overview

Markets are trading the tape, not the model. A fresh burst of conflicting messages from Washington and Tehran briefly knocked Brent back towards $96 before prices steadied, while risk sentiment swung sharply as investors tried to work out whether the latest rhetoric points to genuine de-escalation or simply another tactical pause.

President Trump struck a notably softer tone, pointing to productive contact with Iran, shelving threatened strikes on energy assets and suggesting the Strait of Hormuz could reopen soon. Tehran pushed back immediately, denying talks altogether. That left investors with the same problem seen repeatedly in recent sessions: every diplomatic hint pulls oil lower, every denial puts the risk premium straight back in. With Israel maintaining pressure and Gulf allies sounding increasingly uneasy, markets remain highly sensitive to headlines and reluctant to price a durable peace dividend.

USD: Safe-haven support returns, but it is not unshakeable

The dollar is back on firmer footing as geopolitical nerves reassert themselves. This still looks more like a classic flight to safety than a clean oil-linked terms of trade story, which matters because it makes the move less durable if tensions cool. The US is better insulated from Middle Eastern energy disruption than Europe or much of Asia, so the greenback’s support is being driven primarily by risk aversion and positioning rather than a structural shift in the growth or inflation outlook.

That said, Washington has every incentive to talk down the energy premium. Higher crude feeds quickly into US inflation expectations, Treasury pricing and mortgage costs, so the White House has been quick to lean on de-escalation language whenever possible. For now, the dollar should stay supported while the Strait remains a source of disruption, but the move looks vulnerable to reversal if markets become convinced that supply risks have peaked.

GBP: Sterling loses its relief bid as geopolitics reprice the outlook

Sterling’s earlier rebound on tentative diplomatic optimism has faded. GBP/USD slipped back to the 1.34 area after reports that Saudi Arabia and the UAE were edging towards a tougher regional stance, reinforcing the view that the conflict may yet broaden rather than cool. That has put the recent relief rally on hold and returned cable to a more defensive footing.

Even so, sterling’s underlying profile remains more resilient than many of its peers. Since the conflict began, markets have built in a more hawkish Bank of England path, reflecting persistent domestic inflation and the UK’s relatively direct exposure to higher energy costs. In calmer conditions, that rates support can reassert itself quickly. For now, however, sterling remains hostage to swings in risk appetite, with geopolitical stress overpowering the domestic rates story.

EUR: The euro is still trading as an energy proxy

The euro remains tightly tied to the oil narrative. Yesterday’s rebound against the dollar showed how quickly EUR/USD can recover when crude eases and front-end yields fall, but the move also underlined how fragile that support is. Iran’s denial of talks, continued pressure from Israel and uncertainty over shipping through Hormuz leave the single currency highly reactive to each twist in the geopolitical story.

Intraday price action captured that instability perfectly, with EUR/USD swinging from 1.1485 to 1.1640 before settling back. Lower euro area yields offered some support, but energy remains the dominant driver. Technically, a move above the 21-day moving average near 1.1617 would improve the short-term picture and bring 1.1667 back into view. Until then, rallies are likely to be treated cautiously, particularly if oil starts climbing again.

Looking ahead

• Watch for any credible confirmation, or rejection, of US-Iran contact.
• The Strait of Hormuz remains the key macro trigger for oil, FX and rates.
• Dollar strength should persist while markets stay risk averse, but it could unwind quickly on clearer de-escalation.
• Sterling still has relative support from Bank of England pricing, though headline risk is dominating near-term moves.
• The euro remains the most exposed G10 currency to renewed energy stress.
• Any sign that Gulf producers face prolonged export disruption would likely push crude higher and revive broader defensive positioning.