Market overview

Friday’s signal from Tehran that the Strait of Hormuz was fully open gave markets a glimpse of where pricing could settle if tensions ease more decisively. In that scenario, the dollar index looked closer to 97.50 to 98.00, while EUR/USD pointed to levels just above 1.18.

That optimism faded quickly after Iran indicated over the weekend that the strait was blocked once again and diplomatic progress had stalled. Even so, markets still appear to view this as a setback rather than a collapse in negotiations, with both sides seen as having a strong incentive to return to the table.

The broader FX question is whether the dollar is still trading on geopolitical risk, or whether it is increasingly reflecting a wider US policy and financial stability premium. That remains an important theme, particularly as risk appetite elsewhere has improved sharply.

USD: Still soft, even as risk sentiment improves

The dollar remains under pressure, but the backdrop is no longer a simple flight-to-safety story. If the Hormuz disruption fades and diplomacy regains momentum, a further unwind in the dollar’s geopolitical support looks plausible.

At the same time, the greenback also appears to be reflecting a wider policy credibility discount. Investors have spent the past year adjusting to a more unpredictable US policy mix, where protectionism, deficit spending and deglobalisation risks have all played a part. That uncertainty has left the dollar more vulnerable, even in sessions where broader market sentiment has improved.

The key near-term test is whether markets continue to separate strong equity performance from dollar direction. For now, that is exactly what they are doing.

GBP: Politics back in view

Sterling has held up reasonably well, even as markets have pared back expectations for further Bank of England tightening. Pricing still implies one 25bp rate rise this year, while our house view remains that Bank Rate is more likely to stay unchanged. That final tightening expectation may not fully disappear until energy prices ease more convincingly.

Domestic politics also returns to the foreground this week. The Prime Minister faces scrutiny in Parliament over the Mandelson affair, with further attention likely when Sir Oliver Robbins appears before MPs on Tuesday. The episode may generate headlines, but for now it does not look like a leadership-threatening event.

From an FX perspective, cable may struggle to hold all of its recent gains and could drift back towards the 1.3380 to 1.3400 area. That said, broader downside in both GBP/USD and GBP/EUR may remain limited if US-Iran dialogue resumes and risk sentiment stays constructive.

EUR: Waiting for the data and the ECB

The euro starts the week with plenty of central bank commentary before the ECB enters its blackout period on Thursday. The message from policymakers has been fairly consistent: the Governing Council is willing to act if needed, but not yet. Markets have responded by removing the chance of an April move and now price only around even odds of a June hike.

Our expectation remains that the ECB delivers in June.

Away from the speakers, the focus shifts to survey data. German ZEW is due tomorrow, followed by eurozone PMIs on Thursday and the Ifo survey on Friday. March readings were more resilient than feared, so this week’s releases will be important in judging whether confidence has held up or started to soften more materially.

We remain somewhat cautious on risk and continue to see EUR/USD settling closer to the 1.17 area rather than sustaining a move much above that level.

Looking ahead

• Watch for any fresh signal that Washington and Tehran are moving back towards negotiations.
• ECB speakers early in the week may refine expectations for June, but data should matter more.
• German ZEW, eurozone PMIs and Ifo will shape the near-term euro narrative.
• UK politics could create some short-term sterling noise, though a lasting market impact still looks unlikely.
• In spot, key levels to watch are 97.50 to 98.00 in DXY, 1.17 in EUR/USD and 1.3380 to 1.3400 in GBP/USD.