Market overview

FX markets have moved quickly to unwind the war premium, with the dollar softer, high-beta currencies better supported and EUR/USD testing the upper end of its recent range. Sterling has also found a lift from improved risk appetite, although GBP/EUR remains a more restrained reflection of UK fundamentals.

For now, the market is rewarding de-escalation risk, but the move looks vulnerable. With USD already close to pre-war levels and EUR/USD pressing higher without firm evidence of a peace deal, FX positioning leaves little margin for disappointment.

USD: Optimism leaves upside risk

The dollar index is only around 0.5% above pre-war levels, suggesting markets have moved quickly to price a positive outcome from renewed US-Iran talks.

That looks premature. The first round of negotiations delivered little, and while softer March PPI helped reinforce expectations for Fed easing, current pricing still looks vulnerable to any setback in diplomacy.

The Fed Beige Book, Fed speakers and February TIC data are in focus today. Kevin Warsh’s Senate hearing on 21 April also matters, with risks skewed lower for USD and front-end rates if markets begin to price a more dovish Fed path.

GBP: Sterling gains, but conviction is limited

Sterling has benefited from the broader improvement in risk sentiment and the weaker dollar, lifting GBP/USD above pre-war levels. GBP/EUR, however, has been less impressive, rising only modestly towards 1.15.

Rate support is also fading. Expectations for Bank of England tightening eased again yesterday, with December pricing falling 10bp to 34bp. BoE officials continue to sound less hawkish than their ECB peers, with Andrew Bailey and Megan Greene both stressing patience and the need to assess second-round effects before drawing policy conclusions. Bailey speaks again today.

That suggests sterling-specific sentiment remains fragile. UK headwinds are still clear: higher energy costs, softer employment, stretched public finances and political uncertainty before May’s local elections.

GBP/EUR can test 1.1550 or 1.16 if risk appetite improves further, but a return to 1.1440 looks just as plausible.

EUR: ECB support is fading

Christine Lagarde offered little new guidance, though her comments placed the economy between the ECB’s baseline and adverse scenarios, a mildly dovish signal at the margin.

Other ECB officials have sounded firmer, keeping the case alive for two further rate hikes under a gradual de-escalation scenario. Still, euro support is losing momentum, with other European developed-market currencies outperforming.

EUR/USD needs clearer progress on a peace plan to hold above 1.1800. Without that, downside risks are building, though a break beyond 1.1850 remains possible if talks deliver tangible progress.

Looking ahead

• US Beige Book, Fed speakers and TIC flows are today’s main USD drivers.
• Lagarde and other ECB officials remain in focus in Washington.
• Bailey speaks again, with markets watching for any shift in BoE tone.
• Diplomacy remains the key swing factor for oil, equities and FX risk sentiment.