Market overview

Markets opened the week on a firmer footing as geopolitical concerns eased and technology shares regained momentum. Iran signalled that its military action against Israel had ended, while President Trump adopted a more constructive tone on talks with Tehran. That combination helped calm fears of a broader regional escalation and gave risk assets room to recover.

Lower oil prices and softer Treasury yields added to the positive tone, supporting a rebound across equities. The Nasdaq 100 rose 1.6%, led by a sharp recovery in semiconductor names, with that momentum extending into Asia overnight. South Korea’s Kospi regained most of its early-week decline as chipmakers tracked the strong move in the US semiconductor sector.

USD: Softer tone, firmer foundations

The dollar eased as improved risk appetite and lower energy prices reduced demand for defensive positioning. However, the broader downside looks limited while US rates remain supportive and the macro backdrop continues to outperform.

Markets are now pricing close to 30bp of further Fed tightening this year, with around 50bp priced by Q2 2027. That leaves the dollar well anchored despite the near-term improvement in sentiment.

Geopolitical headlines are likely to keep driving short-term volatility, but beneath the noise, the US rate advantage and relative growth resilience remain the key pillars of USD support.

GBP: Sterling bounce needs follow-through

Sterling recovered from the 1.33 area against the dollar, a level that has repeatedly acted as a key pivot since March. The rebound has taken GBP/USD back towards 1.3370, reducing immediate downside pressure after the market had started to focus on a possible move towards 1.3250 and 1.3160.

That said, the recovery still needs to do more. A move back through the 1.3440 to 1.3480 resistance zone would be needed to challenge the current bearish bias. Until then, the balance of risks remains modestly dollar-positive, helped by stronger US growth expectations and higher US real yields.

The UK backdrop has also become less supportive. Recent data have softened, while domestic political uncertainty is again creeping into the gilt market narrative. Investors appear cautious around any potential policy shift that could imply looser fiscal discipline or heavier gilt supply.

For now, however, sterling remains largely driven by global risk conditions, and the improvement in equities has helped the pound stabilise at the start of the week.

EUR: ECB meeting limits upside

EUR/USD has recovered from support near 1.15 after slipping below 1.16, but the pair has struggled to reclaim 1.1550 with conviction. That price action suggests Friday’s break lower was not purely a geopolitical move. Instead, it looks more like confirmation of a hawkish Fed repricing relative to the ECB, triggered by the stronger US jobs data.

We expect EUR/USD to hold above 1.15 for now, while finding it difficult to extend meaningfully beyond 1.1550 ahead of Thursday’s ECB meeting. The key focus will be the updated staff projections.

A data-dependent message from the ECB, alongside the likely mix of higher inflation forecasts and weaker growth assumptions, should limit any clean directional support for the euro. A move towards 1.1450 remains possible this week if growth revisions disappoint, particularly given the recent softness in euro area data, including Germany’s factory orders.

Looking ahead

• Geopolitical headlines remain the main swing factor for day-to-day risk sentiment.
• Lower oil prices should continue to support equities and risk-sensitive FX if de-escalation holds.
• The dollar is likely to stay underpinned by US rate expectations and resilient growth data.
• GBP/USD needs to regain 1.3440 to 1.3480 to ease bearish pressure.
• EUR/USD remains capped ahead of the ECB, with 1.15 and 1.1450 the key downside levels to watch.