• Geopolitical tensions are supporting oil prices but failing to boost the USD significantly—peace talks could weaken it.

• G7 summit trade headlines may be a stronger bullish catalyst for the dollar if tariff pauses are extended.

• Retail sales data and FOMC expectations are keeping dollar traders cautious in the near term.

• BoJ tapering begins April 2026 with limited short-term market impact; one dissenter flags possible volatility.

• GBP weakness vs EUR is likely to continue, with Lloyds recommending selling rallies and targeting 1.1594.

USD: Support from Trade Hopes, Not the Middle East

While tensions between Israel and Iran persist, markets aren’t pushing the US dollar dramatically higher. The real channel of geopolitical influence remains oil. Prices have stayed elevated, reflecting a lingering risk premium, but there’s a sense that the worst may be over—unless major supply issues emerge. Should peace talks (brokered by the US) gain traction, expect the dollar to lose some ground.

However, the real USD driver today could be trade. The G7 summit in Canada may yield headlines about extending the current tariff truce. Historically, President Trump’s tone softens post-face-to-face talks, and any indication that tariffs will be paused further could lift the dollar.

In terms of data, US retail sales for May are on the docket following a surprisingly weak Empire State Manufacturing reading, which reinforced the negative impact of tariffs on domestic producers.

Overall, the dollar could gain today if the G7 delivers constructive trade signals, though caution may prevail ahead of tomorrow’s FOMC announcement.

JPY: Market Reaction Tame Post-BoJ Decision

The Japanese yen ticked slightly higher to 144.46 against the dollar but stayed within a tight range. Japanese government bond (JGB) futures dipped after the Bank of Japan confirmed its policy rate at 0.5% and announced a gradual taper of JGB purchases starting April 2026—both in line with expectations.

One BoJ member dissented, and a follow-up meeting with the Ministry of Finance and primary dealers later this week could add some volatility. However, since the taper impacts longer-term bonds more than short ones, this doesn’t necessarily imply rate hikes are off the table.

EUR: ZEW May Fall Short

EUR/USD continues to struggle to break above 1.160, validating the current cautious tone. While risks of a move higher exist—such as trade disappointments or oil falling—the upside appears capped for now.

ECB’s Joachim Nagel highlighted rising oil as a potential inflation threat, but overall messaging aligns with ECB President Lagarde’s steady tone on rates. Unless Brent crude prices decline meaningfully, markets are unlikely to bring forward expectations for the next rate cut.

Today’s German ZEW survey could have some impact. A modest rebound in expectations is forecast, but broader trade tensions with the US could weigh on sentiment.

EUR/USD remains vulnerable near-term, and while the market likes to buy the dip, we see 1.15 as more realistic than 1.16 for now.

GBP: Pound Weakens Against Euro, Holds vs Dollar

According to Lloyds Bank, the pound is showing renewed weakness against the euro following lackluster price action in recent weeks. A break below 1.1816 GBP/EUR (above 0.8463 EUR/GBP) sparked a move higher in EUR/GBP.

With the pair back through the 0.85 level, Lloyds sees further euro strength ahead, targeting 0.8625 (GBP/EUR below 1.16). They advise selling into any pound strength versus the euro while maintaining a more positive outlook for GBP/USD.