FX Market Update: Dollar Retreats as Iran Peace Hopes Boost Risk Appetite.

• USD – The dollar has softened following a surge in risk appetite driven by optimism surrounding a potential US-Iran peace agreement, although lingering uncertainty continues to provide some underlying support.

• EUR – The euro remains relatively supported, with recent ECB hawkishness offsetting the impact of improving global risk sentiment and lower energy prices.
  

• GBP – Sterling remains under pressure as weak economic growth and mounting political uncertainty continue to weigh on confidence.

USD:

The dollar came under notable pressure yesterday as markets embraced the prospect of a potential US-Iran peace agreement, with reports suggesting a deal could be signed as soon as this weekend. Risk sentiment improved sharply after President Trump indicated that the final points of an agreement had been approved by all parties involved, prompting gains in global equities and higher-beta currencies at the expense of the dollar.

Despite the move lower, markets remain cautious about fully pricing in a lasting resolution, particularly given the ongoing economic effects of recent energy supply disruptions. Expectations for further Federal Reserve tightening have eased marginally, but markets still see a strong probability of another rate hike this year, supported by elevated inflation readings, including yesterday’s Producer Price Index data. With only the University of Michigan consumer sentiment survey due today, broader market sentiment and geopolitical developments are likely to remain the primary drivers of USD direction.

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EUR: 

The euro remains in a relatively stable position, although yesterday’s gains were limited by the broader improvement in global risk sentiment. The European Central Bank delivered a rate hike as expected, but attention quickly shifted to the accompanying hawkish rhetoric, with subsequent reports suggesting that another increase as soon as July remains a realistic possibility.

While expectations for further ECB tightening continue to support the single currency, the sharp decline in oil prices following developments surrounding Iran has prompted some investors to reassess how many additional hikes may ultimately be required. As a result, the euro retains a constructive backdrop, but upside momentum may remain measured unless incoming data reinforces the case for continued policy tightening.

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GBP: 

Sterling continues to face headwinds following confirmation that the UK economy contracted by 0.1% in April, reinforcing concerns around the country’s sluggish growth outlook. The weaker economic backdrop adds to expectations that policymakers will face increasing pressure to support activity in the months ahead.

Political uncertainty has also intensified, with further instability emerging within the government following the resignation of Defence Secretary John Healey and Al Carns. The developments have raised additional questions around the government’s position and leadership stability, creating another source of caution for investors. In the absence of stronger economic data or a clearer political outlook, sterling’s upside potential appears limited in the near term.

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