Market overview

Geopolitical risk has moved back to the top of the agenda after weekend talks between the US and Iran failed to produce a breakthrough. Washington’s decision to proceed with a naval blockade of Iranian ports has put the Strait of Hormuz back at the centre of the market narrative and sent energy sharply higher, with Brent climbing above $103 per barrel and European gas futures posting a steep rise.

The broader cross-asset reaction has been defensive, though not disorderly. Equities opened lower and core fixed income found some support, but the tone has been notably calmer than in the early phase of the conflict. In FX, the picture is more nuanced than the broader risk backdrop might imply. The dollar is firmer, but the move lacks the conviction normally associated with a full flight to safety. EUR/USD remains relatively elevated, while sterling has softened modestly as risk appetite deteriorates.

That leaves the FX market in an interesting position. Investors are still acknowledging the dollar’s defensive qualities, but the traditional haven response is no longer clean or automatic. Instead, price action suggests markets are wary of escalation, while stopping short of embracing a sustained USD breakout. For now, the clearest transmission channel remains energy, with currencies trading less on panic and more on how higher oil and gas prices feed into growth, inflation and rate expectations.

USD: Supported, but no longer dominant

The dollar retains an underlying advantage in the current environment, though the haven bid looks less compelling than earlier in the conflict. Recent price action points to continued support for USD on geopolitical deterioration, but the scale of the move has been limited given the size of the shock.

US rates are likely to become more complicated once the initial headlines fade. Front-end yields may drift lower on defensive demand, but any sustained upside in oil is likely to push inflation expectations higher again and leave the long end exposed to renewed pressure. That risk has become more relevant after last week’s US CPI report, which already showed a marked rise in headline inflation driven by energy.

The key point is that markets still struggle to price a rapid end to the conflict, and that should keep the dollar supported at a structural level. Even so, USD strength is no longer as forceful or as automatic as it was earlier on. Investors appear more conditioned to geopolitical volatility, which is reducing the intensity of the traditional safe-haven response.

GBP: Softer start, but no sign of capitulation

Sterling has opened the week on a softer footing as hopes for a diplomatic breakthrough faded after the weekend. Given the pound’s higher-beta profile, that reaction makes sense, particularly after the more constructive expectations built into markets ahead of the negotiations.

Even so, the move has been contained rather than disorderly. Lingering hopes that talks could resume, together with the absence of a broader collapse in sentiment, have helped prevent a sharper deterioration in GBP. With the UK data calendar relatively light, geopolitics is likely to remain the dominant driver in the near term.

GBP/USD looks vulnerable after last week’s move above the 200-day moving average near 1.3430 failed to generate follow-through. A drift back below that level appears justified, although a test of 1.32 still looks unlikely without a more forceful re-escalation. For now, the 1.3350 to 1.3430 area looks a more reasonable short-term range. Against the euro, sterling has started the week under pressure as higher oil and gas prices weigh on sentiment, but GBP/EUR should remain supported above the 1.1405 to 1.1445 zone unless the geopolitical backdrop worsens materially.

EUR: Resilient, but not convincingly strong

EUR/USD has been notably stable given the scale of the weekend developments. The pair remains close to 1.17, near the upper end of its recent range, despite failed talks, a renewed surge in energy prices and tighter pressure on a critical shipping route. Under normal circumstances, that combination would have been expected to generate a more decisive euro sell-off.

Part of the explanation may lie in the US becoming more directly entangled in the conflict, which limits the relative advantage for the dollar. It may also reflect a broader fading in USD haven demand, as investors become less reactive to recurring geopolitical shocks than they were earlier in the year.

That said, the euro’s resilience should not be mistaken for outright strength. Europe remains structurally more exposed to energy-price volatility, and any sustained move higher in crude or gas would tighten financial conditions and revive the familiar growth-inflation squeeze. For now, EUR/USD appears to be holding up more because of softer USD demand than because of renewed confidence in the euro area outlook. A more meaningful move lower in the pair likely requires escalation that is both prolonged and clearly more damaging for Europe.

Looking ahead

• Energy remains the main macro transmission channel, with oil and gas the clearest real-time markers of escalation risk.
• USD should stay supported at a broad level, though further gains may be harder to extend without a clearer deterioration in risk sentiment.
• Treasury curve dynamics will be important, especially if higher oil feeds more directly into inflation expectations.
• Sterling is likely to stay headline-driven in a quiet domestic week, with broader market sentiment doing most of the work.
• Euro resilience is notable, but Europe’s sensitivity to energy costs means that support could fade quickly if the shock persists.
• Any sign that negotiations may resume would help put a floor under risk assets, though markets are still far from pricing a quick resolution.