FX Market Update: Dollar Retreats as Geopolitical Risks Ease, While Central Banks Take Centre Stage.

  • USD – Has softened as safe-haven demand fades following the US-Iran peace deal and the reopening of the Strait of Hormuz. Focus now shifts to a pivotal week of central bank decisions, particularly the Federal Reserve.

  • EUR – Remains moderately supported, benefiting from the weaker dollar and improving risk sentiment, though gains are likely to be driven by external developments rather than ECB policy.

  • GBP – Faces a crucial week with inflation, labour market data, and the Bank of England decision all due. Expectations for further tightening have eased, leaving sterling sensitive to any policy surprises.

USD:

The dollar has come under pressure as markets respond positively to the announcement of a US-Iran peace deal and the reopening of the Strait of Hormuz. Oil prices have fallen to three-month lows, equities have rallied, and demand for traditional safe-haven assets has eased. A formal signing ceremony is expected on Friday, and a meaningful resumption of shipping through the Strait could further unwind the dollar’s recent geopolitical support.

Attention now turns to a busy week for global central banks, with policy meetings scheduled from the Federal Reserve, Bank of England, Swiss National Bank, Bank of Japan, Reserve Bank of Australia, Norges Bank, and Riksbank. The Federal Reserve meeting is particularly significant as it marks the first under new Chair Kevin Warsh and includes updated economic projections and the closely watched dot plot of interest rate expectations. While markets still anticipate one rate hike this year, confidence in that outlook has weakened compared with a week ago.

EUR: 

The euro remains in a relatively favourable position as improving global risk sentiment and a softer dollar provide modest support. With the European Central Bank having already delivered its latest policy decision, attention has shifted away from ECB developments and towards broader market themes, particularly global central bank policy and geopolitical developments in the Middle East.

EUR/USD has recovered modestly since last week’s lows, largely driven by optimism surrounding the peace agreement and the resulting decline in safe-haven demand for the dollar. At the same time, markets have reduced expectations for future interest rate increases globally, including scaling back expectations for ECB tightening. While this may limit the euro’s upside potential, the currency could continue to benefit if the dollar remains under pressure and risk sentiment stays constructive.

GBP: 

Sterling faces an important week, with several key domestic events likely to shape near-term direction. Wednesday brings the release of May CPI data, where inflation is expected to remain elevated at around 3.0%. This is followed on Thursday by labour market figures, including wage growth and payroll data, alongside the latest Bank of England policy decision.

Market expectations for further policy tightening have been scaled back significantly in recent weeks as geopolitical tensions have eased and policymakers have cautioned against assuming stronger economic momentum while activity remains subdued. The Bank of England is widely expected to leave rates unchanged this week, meaning investor focus will centre on the voting split and any changes to policy guidance. Alongside the economic calendar, political developments could also attract attention, with Andy Burnham seeking election to Parliament on Thursday, potentially adding another layer of uncertainty for sterling should the domestic political backdrop become more active.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.