Market overview

Markets latched onto the prospect of de-escalation and ran with it. A mixed but steady US data backdrop helped at the open, with February JOLTS job openings easing to 6.88 million and March consumer confidence surprising higher at 91.8, but macro releases quickly gave way to geopolitics as the dominant driver.

Reports that Iran may be open to ending the conflict, subject to credible security guarantees, were enough to trigger a broad relief move. That was less about genuinely new information and more about how ready investors were to embrace any plausible route to lower tensions, particularly into quarter-end.

US equities responded decisively. The S&P 500 rose 2.65%, while the Nasdaq 100 and S&P 500 posted their strongest sessions since 12 May 2025. Brent fell roughly 2.5%, though WTI remained above $100 a barrel, suggesting the scale of the equity rally was not simply an oil story. Markets were pricing a broader de-escalation outcome, not just a partial easing in energy pressure.

That said, the underlying backdrop still looks fragile. Flows through the Strait of Hormuz remain impaired, strikes across the region continue, and the recent attack on a Kuwaiti oil tanker is a reminder that physical risk has not materially faded. For now, market pricing looks more optimistic than the facts on the ground.

USD: Safe-haven demand starts to unwind

The dollar finally gave ground after five straight sessions of gains and a push to its strongest level since May 2025. The roughly 0.7% pullback, despite WTI holding above $100, points to a reversal in haven demand and some quarter-end position trimming.

That makes FX especially important here. If the market truly believes a diplomatic exit is becoming more credible, sustained dollar weakness alongside still-firm energy prices would reinforce that view. By contrast, a renewed dollar rally would suggest investors have moved too quickly and that the risk rebound is vulnerable.

In that sense, the dollar remains the cleanest real-time gauge of sentiment. Equities can overreact, and oil can be distorted by supply concerns, but FX tends to be more direct when the market is reassessing geopolitical tail risk.

GBP: Yield support helps, but sterling is still hostage to risk

Sterling remains caught between rate support and a difficult external backdrop. The pound is down around 2% against the dollar year to date, while staying broadly flat against the euro. Earlier softness reflected a more dovish shift in Bank of England expectations in February, softer inflation signals, political noise around Starmer’s leadership, and a more defensive global tone as the conflict intensified.

More recently, however, hawkish repricing in the BoE path has offered some support. That has created a familiar pattern: when UK rate expectations firm, sterling steadies; when those expectations are pared back, the currency loses altitude again. The market is no longer pricing the more aggressive tightening profile seen earlier in the month, with expectations now closer to two hikes by year-end rather than four.

GBP/USD held above 1.32 yesterday, a level that has repeatedly acted as support since the post-Liberation Day trading range began on 2 April 2025. That floor may remain under pressure if de-escalation hopes fail to turn into firmer evidence. Over the medium term, though, a more durable easing in tensions could allow 1.32 to re-establish itself as a base, particularly if the BoE retains a relatively hawkish bias.

Against the euro, sterling has started to give back some of its March outperformance. As war-related positioning unwinds, EUR/USD has rebounded faster than GBP/USD, pushing GBP/EUR lower. If the full war premium continues to fade, a move towards 1.14 in GBP/EUR looks plausible, roughly the area seen before hostilities escalated.

EUR: Inflation surprise helps, but policy delivery matters

The euro gained nearly 0.8% against the dollar yesterday, supported by the broader improvement in risk appetite and a sharp upside surprise in euro area inflation, the largest monthly rise since 2022. That has strengthened the case for tighter ECB policy, at least in market pricing.

The issue is whether the ECB follows through. Nominal euro rates have risen, but not enough to keep pace with inflation expectations, leaving the 10-year real rate differential moving against EUR/USD. If inflation expectations remain elevated but the ECB declines to raise rates in April, that combination would quickly turn less supportive for the single currency.

EUR/USD ended March in the 1.15 to 1.16 area after trading as low as 1.1411 earlier in the month. Even so, the pair still posted a drop of more than 2% over March, its weakest monthly performance since July, and remains roughly 4% below its 2026 peak. Yesterday’s rebound was notable, but the broader short-term trend still looks soft, with the 50-week moving average continuing to limit upside progress.

Looking ahead

• Watch for hard confirmation on any ceasefire framework, not just rhetoric.
• Monitor shipping conditions through the Strait of Hormuz, including insurance costs and war-risk premia.
• Track whether dollar weakness extends. That would strengthen the case for a more durable risk recovery.
• Keep an eye on the equity-oil relationship. If WTI stays above $100, equity strength may become harder to justify.
• For sterling, 1.32 in GBP/USD remains the key near-term support.
• For the euro, the next move increasingly depends on whether the ECB validates the inflation signal with policy action.