USD – Remains softening, as improving market sentiment reduces safe-haven demand, though direction now hinges on central bank guidance.

EUR – Is showing modest strength, benefiting from recent dollar weakness and positioning ahead of key policy decisions.

GBP – Is recovering slightly, tracking broader risk sentiment but still sensitive to domestic data and upcoming policy signals.

USD:

The dollar weakened yesterday as risk sentiment improved, pushing equities and risk-sensitive currencies higher while weighing on traditional safe havens. This comes despite ongoing background volatility from the Iran conflict and oil price movements.

Focus now turns to the Federal Reserve, with markets expecting a more hawkish tone compared to earlier in the year due to the recent energy-driven inflation spike. This could include adjustments to the ‘dot plot’, potentially removing previously expected rate cuts.

While policymakers are likely to keep flexibility, markets are still pricing in at least one rate cut this year, down from two prior to the escalation in geopolitical tensions.

EUR:

EUR/USD climbed to its highest level in nearly a week, with recent price action being largely dollar-driven rather than euro-specific. This dynamic is likely to continue in the near term.

Attention will first be on the Fed before shifting to the European Central Bank decision, where markets are increasingly looking for signals of potential rate hikes. The euro may continue to find support if the dollar remains on the back foot, though broader direction will depend on central bank guidance.

GBP:

Sterling moved higher alongside other currencies yesterday as risk appetite improved, benefiting from the softer dollar environment.

Today’s focus remains on global drivers, including the Fed and developments in the Middle East, but attention quickly shifts to domestic events. Tomorrow brings key UK labour market data, followed by the Bank of England decision.

Wage growth is expected to cool to 3.9% (headline) and 4.0% (ex-bonus), while employment is forecast to decline by around –10K. These releases, alongside central bank guidance, will be crucial in shaping the near-term outlook for sterling.