Market overview

Markets are growing less reactive to fresh Middle East headlines, with investors increasingly focused on whether escalation translates into a sustained oil shock, tighter financial conditions or a renewed rush into safe havens. For now, the message is mixed: oil has eased, risk sentiment has stabilised, and the US dollar has retained its defensive appeal.

Brent remains near $106 a barrel, but the market appears to be pricing in a lower probability of another large-scale exchange. Negotiation headlines are still filtering through, helping to cap the immediate risk premium. Even so, the dollar’s bias remains to the upside while geopolitical uncertainty persists, particularly with inflation risks still front of mind and global bond markets under pressure.

USD: Safe-haven bid remains intact

The dollar dipped 0.2% yesterday as oil prices softened, but the broader trend remains constructive. The DXY has moved back into the 99 area, levels last seen during the previous peak in Middle East tensions.

Fed minutes from the April 29 to 30 meeting reinforced the hawkish tone. Support for eventual rate cuts has narrowed, with many policymakers prepared to remove the easing bias. While there was limited discussion of an outright hike, the message was clear: policy is likely to stay restrictive unless inflation moves convincingly back towards target.

In the absence of a clear de-escalation, the dollar should remain well supported by safe-haven demand, firm US yields and a resilient domestic macro backdrop.

GBP: Sterling supported despite softer UK data

Sterling has gained against most major currencies this week, with GBP/USD back above 1.34 and GBP/EUR above 1.155. The move has come despite weaker UK labour data and a softer inflation print, which led markets to trim Bank of England rate expectations.

The rates channel has therefore not been the main driver. Instead, sterling has benefited from improved global risk appetite, lower oil prices and reduced domestic political risk. GBP/USD remains more sensitive to geopolitics and energy, while GBP/EUR is being shaped more by UK-specific political and economic developments.

UK flash PMIs are now the key near-term test. A resilient print would help support the view that the economy remains in reasonable shape, even as inflation cools and political uncertainty lingers.

EUR: Limited room to defend against the dollar

EUR/USD is broadly unchanged on the week, but the euro remains vulnerable. The eurozone’s weaker growth profile, high energy exposure and sensitivity to rising risk premia leave the currency poorly placed when geopolitical risks rise.

Bond markets have paused after a sharp sell-off, with investors already pricing a meaningful amount of central bank hawkishness. A further leg higher in yields would likely require fresh escalation, higher oil prices or additional inflation evidence.

For now, the euro lacks a clear positive catalyst. If uncertainty over Middle East de-escalation continues, further downside towards 1.16 remains a credible path.

Looking ahead

• UK flash PMIs are due mid-morning London time and will be the main sterling focus.
• A stronger UK PMI print could give the pound further support, particularly against the euro.
• EUR/USD remains vulnerable unless risk sentiment improves or the dollar’s safe-haven bid fades.
• Dollar upside should persist without a meaningful diplomatic breakthrough.
• Oil prices remain central to the FX narrative, especially for GBP/USD and broader risk appetite.