Market overview

Markets are leaning back into a more familiar risk framework, but the cross-asset signal remains mixed. Equities have been happy to look past the latest headlines, while rates remain more reactive, with the US 10-year still taking direction from oil. That leaves energy and geopolitics carrying much of the macro narrative, even as broader risk sentiment looks steadier.

The oil backdrop continues to point firmly towards Asia. Saudi crude flows to China have consistently exceeded shipments to the US by a wide margin, with China typically taking four to six times more volume in recent years. That gap has widened again in early 2026, with exports to the US falling to zero in March and April, while China still took around 1.1mb/d in April.

That keeps the RMB oil settlement story alive, but not yet transformative. There is a clear commercial rationale for more China-linked oil trade to be settled in renminbi, but the wider system remains dollar-led. Liquidity, market depth and strategic relationships still sit overwhelmingly around the USD. The debate has moved faster than the underlying plumbing.

USD: Softer tone, firm boundaries

The dollar has lost some momentum since the ceasefire was confirmed, slipping around 2% and leaving it modestly lower year to date. The move matters, but so do its limits. The USD remains well within its 11-month range, suggesting a pullback rather than a break.

The gap between DXY and the Fed’s broad trade-weighted dollar also remains slightly elevated. That points to softer dollar pressure in the majors, without a full unwind across the wider FX complex.

US data still point to respectable growth rather than clear deterioration, while higher energy prices add a renewed inflation risk. That mix makes a sustained dollar sell-off difficult to justify. Near term, reduced geopolitical stress argues for some USD softness. Medium term, the dollar looks more likely to stay boxed in, with risk appetite driving swings rather than a clean trend.

GBP: Politics bite, but sterling holds its nerve

Sterling has opened calmly despite UK local elections pointing to a difficult result for Labour, with Reform UK making notable early gains. Full results may take longer to settle, but GBP/EUR remains the cleaner expression of the pound’s political risk premium.

A knee-jerk move lower in sterling is possible, particularly if the result is worse than expected. However, a sustained bearish view looks harder to defend while the outcome is already well flagged and the macro backdrop remains relatively supportive.

UK data have surprised positively this year, helping to offset concerns linked to geopolitical uncertainty and higher energy costs. That contrasts with a softer eurozone growth profile and gives the pound a firmer relative footing. Sterling’s carry appeal also remains attractive against the euro in a calmer volatility environment.

The bigger risk is not the election result itself, but what follows. A poor showing could intensify internal pressure on Starmer and create a more persistent political drag. If UK data also begin to lose momentum later in the year, sterling would look more vulnerable.

EUR: Upside capped by growth and geopolitics

EUR/USD continues to struggle for clean follow-through. De-escalation hopes have helped risk sentiment, but confidence in a durable US-Iran peace outcome remains fragile after fresh US strikes near the Strait of Hormuz. Markets have faded the immediate escalation risk, yet the euro has not been able to convert that into a decisive move higher.

Trade policy is another constraint. President Trump’s July 4 deadline for the EU to ratify a trade agreement, alongside renewed tariff threats, adds a fresh macro risk at a time when Europe is already facing energy-linked headwinds.

The bigger issue remains relative growth. The US continues to outperform, while the eurozone has disappointed. German industrial production fell 0.7% month on month in March, with February revised lower, leaving first-quarter output more than 1% below Q4 2025 levels. That reinforces concerns that Europe is absorbing the latest shock less comfortably than the US.

EUR/USD may hold above 1.17 for now, but a move towards 1.18 likely needs clearer de-escalation. A push to 1.20 looks increasingly difficult while growth and rate dynamics lean back towards the dollar.

Looking ahead

• Watch oil and US yields for the next macro impulse.
• USD downside looks limited unless US data soften more clearly.
• GBP/EUR remains the key sterling political risk gauge.
• UK election fallout matters more if it triggers sustained pressure on Starmer.
• EUR/USD upside depends on de-escalation, stronger eurozone data and a less supportive USD rate backdrop.