Market overview

A reported two-week ceasefire between the US and Iran, together with signs that tanker traffic is resuming through the Strait of Hormuz, has triggered a broad relief rally across global markets. For investors, this is close to the cleanest near-term outcome: a reduction in escalation risk, a reopening of a critical shipping route and a sharp reversal in the wartime premium that had built across energy and FX.

Oil has moved lower, the dollar has weakened against most major peers and pro-cyclical currencies are finding support. Sterling has participated fully in the move, rising to around 1.3430 against the dollar and 1.1490 against the euro. The improvement in sentiment also matters for the UK domestically, with lower oil and gas prices offering some support to the growth outlook.

USD: Safe-haven premium unwinds

The dollar is back under pressure as haven demand fades and crude prices fall. A calmer geopolitical backdrop has stripped out a key source of recent USD strength, while the decline in oil has also eroded part of the US terms-of-trade support.

That combination has left the greenback softer across the board. Defensive dollar longs built during the recent period of tension are now being pared back, and for now the market is favouring higher-beta currencies over traditional havens. The immediate question is whether this becomes a broader USD reset or simply a sharp near-term correction.

GBP: Relief rally helps, rates repricing complicates

Sterling has responded well to the shift in mood, particularly against the dollar. GBP/USD has pushed back above 1.34 as the market unwinds safe-haven dollar demand and re-engages with risk-sensitive currencies. Lower energy prices should also be welcomed in the UK, where the domestic economy is exposed to imported cost pressures.

That said, the rates backdrop is less straightforward. As energy-driven inflation fears ease, expectations for further Bank of England tightening may be scaled back. That is positive for borrowers, but not always a clear win for sterling. A softer UK rate profile could remove one of the currency’s recent supports, leaving the pound more dependent on global risk appetite than yield differentials in the days ahead.

Against the euro, the picture is more mixed. Sterling’s earlier outperformance has faded and GBP/EUR has lost momentum after failing to hold gains above 1.16. The cross remains range-bound for now, but the broader tone has become less convincing as markets reassess UK growth risks and the durability of the Bank of England’s hawkish stance.

EUR: Energy reprieve puts the euro back in favour

The euro is one of the clearest winners from the ceasefire headlines. EUR/USD has rallied sharply, helped by the combination of a weaker dollar, lower oil prices and a meaningful decline in Europe’s energy risk premium. With Europe especially exposed to disruption in the Strait of Hormuz, the reopening of shipping routes has immediate significance for the single currency.

The drop in European natural gas prices has added further support, reinforcing the view that the euro had been overly penalised during the recent spike in geopolitical stress. Technicals have also improved materially, with EUR/USD pushing above levels that looked out of reach only days ago.

Even so, the move still needs to prove itself. The ceasefire reduces immediate downside risk, but it does not remove Europe’s structural vulnerabilities or rule out a renewed dollar recovery if US data remain firm. For now, though, the euro has the stronger near-term momentum.

Looking ahead

• Markets will focus on whether the ceasefire holds and whether shipping through the Strait of Hormuz continues without disruption.
• Oil and European gas prices remain central to the FX outlook, particularly for EUR and GBP.
• For sterling, the key issue is whether improved sentiment outweighs a softer Bank of England pricing profile.
• For the dollar, the next test is whether recent losses deepen into a broader unwind or stabilise as macro data retake centre stage.
• For the euro, sustaining gains will depend on whether lower energy risk translates into a more durable improvement in sentiment and positioning.