Market overview

The market has quickly moved back towards a calmer geopolitical read. Weekend disappointment over US-Iran talks in Islamabad gave the dollar only a fleeting lift, and that support faded as crude prices turned lower through the session. Investors appear to be treating the Strait of Hormuz blockade less as a lasting supply shock and more as a pressure tactic designed to force Tehran back into negotiations.

That shift in tone has encouraged another round of dollar selling and left the broader market trading on the view that the worst-case scenario is still unlikely. With positioning now reflecting a relatively constructive outlook, any further gains in risk assets may prove harder to sustain without clearer progress on diplomacy. Equally, a renewed jump in tensions would need to be more serious to trigger a lasting reversal.

China remains an important part of the story. Any disruption to Iranian exports would be especially uncomfortable for Beijing, which strengthens the case for a faster diplomatic outcome. If markets gain confidence that a durable ceasefire is within reach, the dollar index could move back towards pre-conflict levels.

USD: De-escalation back in charge

The dollar has slipped back as geopolitical hedging continues to unwind. Comments from President Trump suggesting Iran had made contact to restart talks reinforced the move, and DXY is now trading modestly below Friday’s close.

The bigger point is that the market is already leaning heavily towards a benign interpretation. That leaves the dollar vulnerable in the near term, but it also means much of the good news is already reflected in price action. From here, only a more material deterioration in the geopolitical backdrop is likely to generate a sustained USD rebound.

Today’s US data calendar includes PPI and NFIB small business optimism. Neither release looks especially likely to shift the broader tone unless there is a clear surprise.

GBP: Sterling benefits, but the cross tells a fuller story

Sterling has enjoyed the softer dollar backdrop, with GBP/USD recovering strongly and moving back above levels seen before the Middle East conflict began. The pair has rallied for several sessions in a row, helped less by a fresh vote of confidence in the UK and more by the retreat in demand for the dollar.

That distinction matters. GBP/EUR paints a less flattering picture for sterling and remains the better guide to domestic sentiment. As the geopolitical risk premium fades, markets can refocus on a softer UK growth backdrop, a difficult political calendar and the possibility that earlier rate hike expectations were overdone.

Bank of England speakers are in focus today, including Governor Bailey, Mann and Greene. Bailey may strike a measured tone and keep the door open to a pause. Our bias remains that the BoE does not validate the degree of tightening still priced by the market, which leaves scope for EUR/GBP to edge higher over time.

EUR: ECB tone likely to stay firm

ECB President Lagarde speaks in Washington later today, alongside earlier appearances from other Governing Council members. Given the recent volatility in energy markets, a still-firm policy message looks more likely than any suggestion that easing tensions materially reduce the case for a restrictive stance.

Markets have only a small amount of tightening priced for the 30 April meeting, so a steady message from policymakers may help reinforce expectations of no move this month. Further out, however, two additional hikes this year are becoming increasingly embedded in rates pricing.

For EUR/USD, a more durable break above 1.180 still looks dependent on tangible progress in US-Iran discussions. Without that, the pair may struggle to extend gains on rhetoric alone.

Looking ahead

• US PPI and NFIB are on today’s calendar, though neither is expected to be a major FX driver.
• ECB speakers, particularly Lagarde, could reinforce the market’s hawkish bias on euro rates.
• BoE remarks may be more important for EUR/GBP than for cable.
• Headlines around Washington, Tehran and Beijing remain the key near-term catalyst for G10 FX.
• A credible ceasefire path would likely weigh further on the dollar, while a fresh escalation would need to be more severe to reverse the current market narrative.