FX Market Update: Geopolitics in Focus as Markets Remain Resilient.

USD – Remains broadly stable despite escalating geopolitical tensions, with markets showing little appetite for traditional safe-haven buying. The dollar has softened over recent days, though this could reverse quickly if risk sentiment deteriorates.

EUR – Continues to demonstrate resilience, outperforming despite heightened geopolitical uncertainty. Expectations for a September rate cut are helping support the euro, although gains could come under pressure if market sentiment worsens.

GBP – Remains on a steady upward trajectory, supported by a lack of negative domestic catalysts. Sterling has continued to strengthen against both the dollar and the euro, with attention now turning to next week’s UK GDP release.

USD:

The key theme this week has been the market’s surprising indifference to the renewed escalation in the Middle East. The effective reclosure of the Strait of Hormuz, following increased military confrontation, has failed to trigger the usual safe-haven flows into the US dollar. While crude oil has edged higher as shipping through the Strait has once again stalled, the dollar has weakened over the past few days rather than strengthening.

It remains uncertain how long this market reaction can persist. Should geopolitical tensions continue to escalate and investors begin to price in greater risk, the dollar could quickly regain its safe-haven appeal, potentially leading to a sharp correction across FX markets. With little in the way of economic data today, market focus remains firmly on developments surrounding Iran and next week’s US CPI release. In Canada, today’s employment change is expected to slow sharply from +87.8K to +10.0K.

EUR:

The euro continues to show impressive resilience despite the deterioration in the geopolitical backdrop. Since reaching a one-year low last month, EUR/USD has recovered by more than 1%, with investors continuing to favour the single currency even as tensions in the Middle East intensify.

Support for the euro has also come from growing confidence that the European Central Bank could deliver a rate cut in September. However, the currency may struggle to maintain its recent strength if equity markets begin to sell off or oil prices move significantly higher. Elsewhere in Europe, Norway’s latest inflation reading came in well below expectations, with CPI at 2.7% versus forecasts of 3.1%, leaving the Norwegian krone as the only major currency underperforming the US dollar today.

GBP:

With little in the way of fresh domestic catalysts, sterling has continued its steady appreciation. GBP/USD has extended its recent rally, rising by almost 2.4% over the past two weeks, while GBP/EUR has gained more than 4% since the budget-driven lows seen last November.

The absence of negative UK developments has allowed sterling to benefit from broader market dynamics, although next week’s UK GDP release for May will be the next major test for the currency and could determine whether its recent momentum can be sustained.