Market overview

FX markets opened with a more constructive tone after fresh hopes of US and Iranian de-escalation supported risk appetite. Reports suggest Washington is reviewing Iran’s interim proposal to reopen the Strait of Hormuz in return for an end to the blockade of Iranian ports, while leaving the more difficult nuclear discussions for later.

The market reaction, however, feels more selective than earlier in the crisis. Investors appear less willing to chase isolated headlines and are looking for firmer evidence that tensions are genuinely easing. That leaves the dollar vulnerable to short-term swings, but with limited scope for a sustained rally unless the geopolitical backdrop worsens materially.

USD: Dollar rebound looks capped

The US dollar index failed to hold a move back towards 99, despite oil prices revisiting levels last seen during the March risk-off episode. The key difference is sentiment. In March, higher oil and geopolitical stress pushed the dollar higher in tandem. This time, improved risk appetite has blunted the usual safe-haven response.

A return above 99 is still possible if weekend developments around Iran’s proposal are not matched by a softer US tone. Yet a durable move back through 100 looks unlikely without a clear deterioration in US-Iran tensions.

The Federal Reserve also limits the upside case. While the Fed retains more hawkish credibility than many peers, it lacks the data cover to deliver a materially stronger hawkish message at tomorrow’s meeting. That should keep rates-driven dollar support contained. For today, DXY looks likely to trade close to 98.50 unless geopolitics delivers a fresh shock.

GBP: Sterling rally pauses, but the backdrop remains firm

Sterling began the week on a mixed footing, caught between resilient global risk appetite and rising oil prices. The pound gained against safe-haven and low-yielding currencies on Monday, but lagged commodity-linked FX, including the Scandis and Antipodeans. A hawkish Bank of Japan hold has also weighed on GBP/JPY, while firmer oil has pulled GBP/USD back towards 1.35.

The broader picture remains constructive. GBP/USD is set for its strongest monthly gain in more than a year, helped by favourable April seasonality and the break above the late-January to March downtrend. Price action now looks more like consolidation than reversal.

GBP/EUR also retains upside potential. The UK-Eurozone economic surprise gap has widened to a two-year high, pointing to stronger relative UK momentum. Supportive yield and OIS differentials, firmer UK PMI trends and a comparatively hawkish Bank of England all suggest sterling has not fully priced the UK’s macro and policy advantage versus the euro area.

Domestic politics remain the main risk. Speculation around Prime Minister Starmer’s leadership could reintroduce a fiscal and uncertainty premium into gilts, particularly as Parliament votes on whether to open an inquiry into the Mandelson appointment ahead of the 7 May local elections.

EUR: Holding the line, but conviction is limited

EUR/USD continues to hold above 1.1680, close to the 200-day moving average. That level remains an important marker for longer-term momentum and its defence points to a market still leaning towards near-term de-escalation in the Middle East.

The pair has now rebuilt support above the 200-day moving average after spending much of March below it. Even so, upside conviction is limited. With the Fed and ECB meetings due tomorrow and Thursday, and little major data today, EUR/USD is likely to consolidate around 1.17.

We continue to see mild downside risks for the euro versus the dollar this week. The Fed’s relatively hawkish stance should remain more credible to markets, particularly given expectations that the US economy is better placed than the eurozone to absorb geopolitical spillovers. That said, this is not yet a strong enough driver to force a clean break below the 200-day moving average.

Looking ahead

• DXY likely remains anchored near 98.50 unless geopolitical news turns materially more negative.
• A move back above 99 is possible, but a sustained break above 100 looks unlikely without renewed escalation.
• EUR/USD should stay close to 1.17 before the Fed and ECB meetings.
• GBP/USD appears to be consolidating rather than reversing, with the broader trend still constructive.
• GBP/EUR retains upside scope, supported by UK macro momentum, yield spreads and a hawkish BoE bias.
• UK political headlines are the main near-term sterling risk.