Market overview

A better tone across global markets is continuing to weigh on the dollar. Investors initially welcomed signs of diplomatic progress between Israel and Lebanon, even though subsequent comments from Israel made clear that military operations against Hezbollah would continue. Even so, markets are trading the direction of travel rather than the detail for now, and that has supported risk assets.

The shift in sentiment has been visible across asset classes. The VIX has fallen sharply from 30 to 20 over the past week, US equities have almost erased their year-to-date losses, and front-end Treasury yields have moved lower as near-term risk premia have been pared back. The result is a familiar mix of softer yields, firmer equities and a weaker dollar.

That backdrop is giving markets room for a relief rally, but confidence still looks conditional rather than settled. Any setback on the geopolitical front could quickly reverse the move.

USD: Softer data, tighter policy trade-off

The dollar remains under pressure as softer US data and falling yields offset lingering geopolitical uncertainty. The latest revisions showed fourth-quarter GDP slowing to an annualised 0.5%, below the previous 0.7%, while jobless claims rose to 219,000 and personal income unexpectedly fell in February. Taken together, the data point to a loss of momentum rather than a clean reacceleration into 2026.

For the Federal Reserve, the backdrop is awkward. Growth is cooling, but inflation is not yet co-operating. Core PCE at 3.0% year on year underlines the stickiness of domestic price pressure, while any renewed energy shock would only complicate the picture further. This leaves the Fed with less room to respond decisively in either direction.

In the near term, that combination is not offering the dollar much support. Softer macro data and lower front-end yields are encouraging a lighter USD bias, particularly while broader market sentiment remains constructive.

GBP: Sterling rides the move, but vulnerabilities remain

Sterling is heading for one of its strongest weeks of the year against the dollar, with GBP/USD recovering the 1.34 area after dipping below 1.32 earlier in the week. The pound has also regained some ground against the euro and has posted solid gains against the yen, although it has lagged the higher-beta commodity currencies.

Part of the move reflects the broad retreat in defensive dollar positioning as markets lean into a better risk backdrop. But sterling’s fundamentals are less straightforward. Energy markets remain tight, and the practical benefit of the ceasefire story is still limited. For the UK, where gas sensitivity remains high, that keeps an inflation premium in play. Options pricing continues to reflect that vulnerability, with sterling attracting stronger volatility demand than the euro.

Domestic politics are another watchpoint. With the May election drawing closer, investors may become more sensitive to any suggestion of a looser fiscal stance under a potential Labour government. That could pressure gilts at the long end and, in turn, temper support for the currency.

Against the dollar, sterling can still extend if risk appetite holds. Against the euro, however, the case looks less secure.

EUR: Euro supported, but 1.17 still looks heavy

EUR/USD has continued to press higher, stringing together four consecutive daily gains and probing resistance just below 1.17. The move through a cluster of longer-dated moving averages is encouraging for euro bulls, but the broader technical picture still suggests limited underlying trend strength. Momentum is improving, though not yet decisive.

The single currency is benefiting from the same forces weighing on the dollar: lower US yields, improved risk sentiment and a market that sees the ECB as relatively firmer than the Fed. That mix has given the euro a favourable near-term backdrop.

Even so, conviction around a sustained break above 1.17 still looks premature. The geopolitical story remains fragile, and markets may demand clearer evidence of durable de-escalation before extending the move much further. In addition, any upside surprise in US CPI could prompt a hawkish repricing in rates and cap further EUR/USD gains.

Looking ahead

• US March CPI is the key near-term event risk and could shape the next move in the dollar.
• Markets will stay highly sensitive to headlines from the Middle East, particularly any change in the current military and diplomatic balance.
• Fed pricing remains vulnerable to both softer activity data and renewed inflation concerns.
• GBP will remain exposed to energy pricing and growing election-related fiscal scrutiny.
• EUR/USD may struggle to establish itself cleanly above 1.17 without a further decline in US yields or a clearer geopolitical improvement.