Market overview

FX markets have shifted back into caution mode after renewed US-Iran exchanges in the Persian Gulf tested confidence in the recent de-escalation story. The dollar has found some support from safer-haven demand, but the move has been uneven, with yen intervention risk limiting broader USD upside.

Oil remains the key channel for markets. Brent and WTI are still supported as traders question whether President Trump’s “Project Freedom” escort plan can quickly restore confidence in Strait of Hormuz shipping. For currencies, that leaves energy importers exposed, high-beta FX vulnerable and havens better bid whenever Gulf headlines worsen.

The euro is softer against the dollar, sterling is under pressure from risk and domestic politics, and FX markets are sending a more cautious signal than equities, which continue to look through the shock for now.

USD: Intervention risk caps the rally

The dollar remains pulled between resilient US data, firmer oil prices and a sharp repricing in USD/JPY after Japan’s intervention. The Bank of Japan’s yen buying and dollar selling forced traders to reassess the risk of further action if yen weakness returns.

That has become the more immediate FX driver than crude volatility. Even with US data holding up and Chair Powell signalling a gradual shift towards a more neutral policy stance, markets are more cautious about chasing dollar strength against the yen.

Still, the dollar retains support. If Gulf tensions intensify or oil prices push higher again, safe-haven demand could help the greenback recover some of its recent losses.

GBP: Political risk meets higher oil

Sterling has started the week softer after the long UK weekend, pressured by weaker risk appetite, higher oil prices and domestic political uncertainty ahead of local elections. GBP/USD has slipped back towards 1.35 after again failing to hold above the 1.36 resistance area.

The wider April recovery remains intact for now, with cable still above key daily moving averages and support in the 1.34 to 1.35 region holding. However, the risk balance is becoming less favourable.

Higher gilt yields are no longer offering clean support. UK long-end yields have risen sharply since the start of the Iran conflict, while front-end yields are also materially higher. Markets appear increasingly concerned that tighter financial conditions, combined with political uncertainty, could weigh on UK growth rather than attract sustained sterling demand.

EUR/GBP is also reflecting this caution, with one-week implied volatility rising as investors focus on the local election outcome and potential pressure on Prime Minister Starmer. For GBP/EUR, supportive UK yield differentials are now being weighed against rising domestic political risk.

EUR: Range holds, but downside risks grow

The euro weakened against the dollar yesterday while gaining against higher-beta G10 and CEE currencies, reflecting its role as a relative safe harbour within Europe rather than a clear outperformer against the greenback.

EUR/USD remains inside its 1.1680 to 1.1750 range, but the balance now looks more vulnerable to a downside break. Sellers are likely to wait for clearer signs that Gulf tensions are becoming more persistent before pushing the pair lower.

Against sterling, the euro has found some support after GBP/EUR failed again near the 1.16 resistance zone. The pair has eased towards 1.1575 and may consolidate while markets await the full UK local election results. Fundamentals still lean in sterling’s favour through yield differentials, but political risk is limiting euro downside.

Looking ahead

• Tuesday: US JOLTS job openings will give markets another read on labour demand.
• Wednesday: ADP employment data and the US Treasury quarterly refunding announcement are in focus.
• Thursday: UK local elections, German factory orders, euro-area retail sales and rate decisions from the Riksbank, Norges Bank and Banxico are due.
• Friday: US nonfarm payrolls and Canada’s employment report provide the week’s main macro test.
• Market focus: Oil headlines, Strait of Hormuz shipping risk, USD/JPY intervention risk and UK political developments remain the key FX drivers.