Market overview

Markets are still rewarding the de-escalation trade, but conviction looks fragile. Oil’s sharp fall has helped ease fears of a more persistent inflation shock, while equities and lower volatility continue to keep broader dollar strength in check. Even so, the macro story has not disappeared. Rates, growth differentials and energy supply risks remain central to FX direction, leaving major pairs broadly range-bound rather than ready for a decisive break.

USD: Dollar held back by softer rates narrative

The dollar remains unable to reclaim the upper end of its recent range, with the DXY still struggling around the 99 area. Investors appear willing to look past renewed geopolitical stress and continue to price a path towards some form of de-escalation.

That said, the dollar is increasingly trading off the US growth and rates story. A softer front end of the Treasury curve has cooled some of the recent hawkish repricing, limiting the greenback’s upside. However, the case for a deeper dollar sell-off is not yet compelling. Inflation data have stayed firm, and markets only recently priced a meaningful Fed tightening impulse back into the curve.

For now, DXY looks more likely to consolidate in the low 99s than break cleanly below 98, unless there is clearer progress towards peace.

GBP: Stable, but still exposed

Sterling has recovered some ground as the domestic political risk premium fades, but the rebound looks more contained than convincing. GBP/EUR is again testing the familiar 1.16 area, although momentum has softened just below that level.

UK assets remain sensitive to the interaction between geopolitics, energy prices and domestic politics. The fall in oil prices has reduced pressure on inflation expectations, strengthening the argument that the Bank of England can avoid further tightening given a fragile labour market. As rate expectations ease, sterling loses some support.

GBP/EUR may remain relatively calm around the 1.15 to 1.16 region, while GBP/USD carries greater upside risk if the de-escalation trade strengthens and the dollar softens further.

EUR: Fundamentals point lower, risk appetite offers cover

EUR/USD remains trapped in a tight 1.16 to 1.18 range, with lower FX volatility dampening directional moves. Markets have become less reactive to geopolitical headlines, leaving the pair driven more by carry, rates and relative growth.

That mix is turning less supportive for the euro. ECB tightening expectations have been pared back, eurozone data surprises have weakened, and real yield spreads have shifted back towards the dollar. The US economy also continues to show stronger underlying momentum than the euro area.

The euro has not yet fully reflected that deterioration because the wider market backdrop remains risk-positive. Firm equities and compressed volatility are helping to restrain dollar demand. Still, the balance of risks for EUR/USD is gradually shifting lower.

Looking ahead

• Watch whether DXY can hold the low 99s or retest the 98 handle.
• EUR/USD downside risks are building if rate and growth divergence persists.
• GBP/EUR remains capped near 1.16, with 1.15 looking like a near-term anchor.
• GBP/USD could press above 1.35 if de-escalation momentum becomes more credible.
• Energy prices remain key for UK inflation expectations, gilt yields and sterling.