FX Market Update: Geopolitical Risk, Crude Volatility and Central Bank Divergence Drive Currency Flows.

USD – Remains firm amid renewed geopolitical tensions and elevated oil prices, supported by safe-haven flows and shifting global rate expectations, but still lacks clear momentum for a breakout.

EUR – Is in a broadly neutral-to-slightly positive position, but remains highly sensitive to US data, energy price swings, and developments in the Strait of Hormuz.

GBP – Is drifting softer amid geopolitical risk aversion and domestic political uncertainty, with UK elections and fiscal credibility concerns adding to the pressure on sterling.

USD:

The dollar is trading in a relatively firm posture, supported by renewed geopolitical risk after the Middle East ceasefire showed further signs of fragility over the weekend. Reports of Iranian strikes linked to UAE targets and US military assets in the Strait of Hormuz have lifted crude prices, reinforcing broader safe-haven demand. At the same time, President Trump’s continued rhetoric around “Project Freedom” and ensuring safe passage through the Strait has added to market uncertainty. Alongside this, shifting global rate expectations are in focus after the Reserve Bank of Australia surprised markets with a hawkish stance, effectively reversing its previous easing cycle and warning that early signs of second-round inflation are emerging. While this is not directly USD-specific, it reinforces a broader narrative of sticky inflation risk across developed markets.

In the US itself, attention turns firmly back to data. The week begins with ISM services and JOLTS job openings, before the main focus on Friday’s non-farm payrolls, where consensus is centred around a relatively soft 65K print. The Dollar Index remains elevated but continues to trade within a broader corrective structure, suggesting that while downside is limited by risk sentiment, upside momentum is still constrained unless data materially surprises to the upside.

EUR:

The euro remains largely reactive, trading in line with shifts in US data expectations and broader geopolitical developments linked to the Strait of Hormuz and crude oil volatility. EURUSD continues to move in tandem with risk sentiment, strengthening when US uncertainty increases and easing when energy-driven inflation concerns push yields and the dollar higher.

Looking ahead, the Eurozone calendar includes PPI inflation tomorrow, retail sales on Thursday, and several ECB speakers throughout the week, including comments from Chief Economist Lane. However, the ECB narrative remains relatively steady and well-telegraphed, limiting fresh directional catalysts. With Eurozone inflation broadly contained and growth still subdued, the euro’s performance is likely to remain range-bound unless there is a clear shift in US macro data or energy market dynamics.

GBP:

Sterling has edged lower over the weekend as geopolitical tensions between the US and Iran have intensified, weighing on broader risk appetite. Domestic political risk is also back in focus ahead of Thursday’s UK local elections, where polling points to a fragmented, multi-party outcome with Labour expected to lose ground to Reform, the Liberal Democrats, and the Greens.

The key market concern is whether a weaker-than-expected Labour result could raise questions over Keir Starmer’s leadership, with gilt markets particularly sensitive to any perception of reduced fiscal discipline under a potential future leadership change. This political uncertainty, combined with a lack of strong domestic macro catalysts, leaves sterling vulnerable in the near term. While UK data remains important, it is currently being overshadowed by external risk drivers and election-related volatility.

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