Market overview

The dollar extended its recent decline, with DXY falling for a fourth session and once again failing to hold above 100. Risk sentiment improved after President Trump suspended planned strikes on Iran and suggested an agreement could be reached by the weekend.

Technology shares led the rally. South Korea’s Kospi rose around 8%, while US equity futures moved higher ahead of SpaceX’s anticipated Nasdaq debut. Even so, major indices remain below record highs, and investors are unlikely to treat the latest diplomatic breakthrough as definitive.

Oil has fallen by roughly 5% this week, but uncertainty over the durability of any agreement and the reopening of the Strait of Hormuz should limit further downside. Energy prices may therefore find a near-term floor rather than enter a sustained decline.

USD: Rate support limits the downside

The improvement in global risk appetite has reduced demand for the dollar as a defensive asset, although losses remain contained.

USD support now extends beyond geopolitics. US real yields remain elevated, inflation continues to exceed expectations and Federal Reserve pricing has shifted in a more hawkish direction. CPI reached a three-year high earlier this week, while Thursday’s strong supercore PPI reading reinforced concerns that underlying price pressures remain persistent.

A calmer geopolitical backdrop may remove part of the dollar’s safe-haven premium, but resilient US data, higher rates and relative growth strength continue to provide a solid anchor.

GBP: Domestic weakness leaves sterling reliant on global sentiment

Sterling traded quietly before renewed optimism over the Strait of Hormuz supported selected GBP crosses. GBP/USD is attempting to recover 1.3420 after falling towards 1.33 last Friday, its lowest level since mid-May.

The 1.33 area coincides with the 200-day moving average, a level breached only twice since early 2026, both during periods of heightened political or geopolitical uncertainty.

Domestic developments remain less supportive. Defence Secretary John Healey’s resignation has added to concerns over party unity, while April GDP contracted by 0.1% and industrial production was unchanged. The data point to a clear loss of momentum after the UK delivered the strongest first-quarter growth among G7 economies.

For now, GBP/USD remains driven primarily by geopolitical headlines. A sustained break above 1.3420 is likely to require clearer evidence of diplomatic progress.

EUR: ECB tightening delivers limited support

The European Central Bank raised its deposit rate by 25 basis points to 2.25%, its first increase since September 2023. The move was widely expected and presented as a precaution against inflationary pressure generated by the Middle East energy shock.

The broader message was less supportive. Updated forecasts showed stronger inflation alongside weaker growth, reinforcing the risk of stagflation. President Lagarde highlighted upside risks to prices but retained a data-dependent stance, leaving expectations for further tightening broadly unchanged.

EUR/USD showed little immediate reaction as the decision was fully priced and offset by resilient US data and a firmer Federal Reserve outlook. Higher ECB rates are no longer an automatic positive for the euro, particularly where tighter policy risks weakening already subdued activity.

Improved geopolitical sentiment nevertheless helped the pair extend its recovery from 1.15, which has acted as an important support level in recent months.

Looking ahead

• Geopolitics: Markets will look for firm evidence that a US-Iran agreement can be completed and sustained.
• Energy: Any progress towards reopening the Strait of Hormuz would increase downside pressure on oil.
• USD: Persistent US inflation and elevated real yields should continue to limit dollar weakness.
• EUR: A sustained advance is likely to require clearer de-escalation or softer US data and more dovish Fed guidance.
• GBP: Attention turns to the Makerfield by-election and the Bank of England’s June policy meeting.