Market overview

Global markets are starting the day on a firmer footing, with equities pushing to fresh highs as investors reassess the probability of a sustained US-Iran ceasefire. The MSCI All Country Index has now recovered its conflict-related decline of around 9%, while Brent crude has fallen nearly 20% this month. The dollar index, meanwhile, remains close to six-week lows as haven demand continues to fade.

The improvement in sentiment has been powerful. Lower oil, calmer volatility and firmer equity markets have encouraged investors to rotate back into higher-beta currencies and risk-sensitive assets. Still, the market now wants more than encouraging headlines. After a month of sharp swings, investors are looking for clearer evidence that talks are progressing and that the path towards de-escalation is becoming more durable.

USD: Tactical weakness, not yet a regime shift

The dollar remains on the back foot as markets continue to remove the geopolitical premium that built through March. Defensive demand has faded quickly as investors price a more constructive outcome between Washington and Tehran. The breadth of the reversal is striking: after gaining against almost 90% of a 50-currency basket in March, the dollar has risen against only 2% so far this month, with the largest G10 losses coming against the Antipodeans, Scandis and sterling.

Even so, this looks more like a position-driven correction than the start of a structural dollar decline. Some March longs had become crowded, leaving the currency exposed once the geopolitical backdrop improved. However, the broader market was not positioned for a sustained dollar squeeze, which helps explain why the reversal has been sharp but not yet decisive.

Rates should also limit the downside. US inflation remains stickier than in most peer economies, and the Fed has shown little urgency to force inflation back to target at speed. As long as the US keeps a relative yield advantage, the dollar can soften on better risk sentiment, but a more disorderly decline still looks unlikely.

GBP: GDP surprise gives sterling another nudge higher

Sterling has extended its recovery, helped by lower energy prices, stronger global risk appetite and a better-than-expected UK GDP print. GBP/USD has moved back towards 1.36, reversing much of the conflict-driven weakness seen against the dollar.

February GDP rose 0.5% month on month, well ahead of the 0.1% consensus and the strongest monthly gain since January 2024. The detail was encouraging, with services expanding for a fourth consecutive month, while production and construction also contributed. The release suggests UK momentum was firmer than previously assumed before the Middle East escalation.

That said, the data is backward-looking. The UK remains exposed to any renewed rise in energy prices, inflation pressure and tighter financial conditions. The GDP beat gives sterling near-term support, but it is unlikely to change the medium-term picture unless geopolitical risks continue to ease.

EUR: EUR/USD pauses below 1.18 as markets wait for proof

The euro has benefited from softer dollar sentiment and improved global risk appetite, but EUR/USD has so far failed to break convincingly above 1.18. That hesitation looks reasonable. The market has already priced a sizeable improvement in the geopolitical backdrop and now needs firmer confirmation that de-escalation is genuinely taking hold.

Yesterday’s reversal of March’s dominant trends, with the dollar lower and the euro firmer, was more contained than earlier moves. This suggests investors are becoming more selective after a volatile run of headline-driven trading. Without clearer evidence of progress between the US and Iran, EUR/USD may struggle to extend the move meaningfully in the near term.

Looking ahead

• US March industrial production is expected to rise 0.1% month on month, slowing from February’s pace.
• Markets will watch closely for confirmation of renewed US-Iran talks and any signs that the ceasefire can be extended.
• Oil remains a key cross-asset signal, with further declines likely to support risk sentiment and weigh on haven demand.
• Fed pricing and relative yields should remain important anchors for the dollar.
• EUR/USD needs stronger de-escalation signals to challenge 1.18 decisively.
• Sterling’s near-term support looks intact, but medium-term upside still depends on lower geopolitical and inflation risks.