Market overview

The USD briefly found support over the past 24 hours, helped less by the lack of progress on a US-Iran deal and more by a wobble in US equities linked to renewed concerns around AI. That rebound faded quickly, suggesting month-end flows may have played a meaningful role.

Energy remains central to the FX story. Markets are watching for any response from Tehran after President Trump said Iran was in a “state of collapse” and wanted the Strait of Hormuz reopened as soon as possible. At the same time, reports that the White House is preparing for a longer blockade have kept supply risks firmly in focus.

The UAE’s decision to leave OPEC+ on 1 May adds a second layer to the oil narrative. In the near term, Hormuz disruption risk points to tighter supply. Further out, Abu Dhabi’s greater freedom to increase output could loosen the market. That tension should limit sustained oil upside and, by extension, cap the dollar’s ability to draw lasting support from energy stress alone.

USD: Fed decision puts dollar rebound to the test

Today’s main event is the Federal Reserve policy decision. Higher fuel and airline costs are pushing CPI back towards 4%, but the Fed has so far treated the move as a temporary supply shock rather than the start of a broader inflation cycle.

The central bank is likely to stress that it is too early to draw firm conclusions on the growth-inflation trade-off. Even so, the latest Middle East signals leave risks tilted towards a more cautious, potentially hawkish tone. Powell’s message may be read with some restraint, particularly if this is his final press conference, but the danger is that he leans firmer rather than softer.

A hawkish surprise could lift the dollar, especially if it weighs on US equities. That equity channel matters today, with earnings from Alphabet, Microsoft, Amazon and Meta set to test the market’s resilience.

GBP: Sterling supported, but policy details matter

GBP/USD remains highly reactive to developments around Iran and the Strait of Hormuz. Markets are waiting for clarity on whether Washington will engage with Iran’s proposed interim deal, which would reopen the strait in exchange for the lifting of the US naval blockade, while leaving more difficult nuclear negotiations for later.

Acceptance of that proposal could open the door for GBP/USD to retest the mid-April highs near 1.36 over the coming days.

For GBP/EUR, tomorrow’s BoE and ECB meetings are likely to be more important. We retain a constructive bias, with the BoE’s tone expected to appear more hawkish than the ECB’s. The Bank has already been reluctant to guide towards further easing while inflation remains elevated, and last week’s firmer data give policymakers some cover to maintain that stance.

A move above 1.1550 in GBP/EUR remains our base case this week. However, markets are already positioned for tough central-bank language, so the details may carry more weight than the headline message. The BoE’s projections and vote split will be key, particularly if they point to greater concern over either downside growth risks or upside inflation pressure.

EUR: 1.1700 remains the key line for EUR/USD sentiment

EUR/USD continues to attract dip-buying below 1.1700, which has become an important gauge of FX market sentiment towards Gulf risk.

That level could come under pressure today if three conditions line up: a hawkish Fed, weaker risk appetite and no visible progress on reopening the Strait of Hormuz. A decisive break lower would then look increasingly likely.

Tomorrow’s ECB meeting should broadly match market expectations, leaving the euro to revert quickly to being driven by risk sentiment and oil. On the data front, flash CPI releases are due today. Spanish headline inflation is expected to rise to 3.5%, with core inflation unchanged at 2.9%, while Germany’s headline rate is expected to move above 2.9%.

Given how much hawkishness is already priced into the front end of the euro curve, the inflation data would need to surprise materially to drive another meaningful sell-off.

Looking ahead

• Fed decision and Powell’s tone are the immediate focus for USD direction.
• US mega-cap earnings could amplify any dollar move through the equity channel.
• Hormuz headlines remain critical for oil, risk appetite and high-beta FX.
• Tomorrow’s BoE and ECB meetings should drive GBP/EUR, with vote splits and projections likely more important than rhetoric.
• EUR/USD 1.1700 and GBP/EUR 1.1550 are the key levels to watch.