Dollar Volatility Surges as Iran Deal Hopes, Oil Swings, and Political Risks Drive Markets.

USD – Remains firm amid geopolitical uncertainty and shifting central bank expectations, supported by safe-haven flows and elevated inflation concerns, though still lacking a decisive breakout catalyst.

EUR – Is trading with a slightly constructive tone as falling oil prices and improving risk sentiment support the single currency, while ECB rate expectations continue to adjust higher.

GBP – Has stabilised after benefiting from broad dollar weakness, but domestic political uncertainty and fiscal credibility concerns continue to leave sterling vulnerable.

USD:

Yesterday saw a sharp spike in volatility as the dollar initially sank on reports that the US and Iran were moving closer toward a deal to end the conflict and reopen the Strait of Hormuz. The move triggered a broad risk rally, with NZD (1.2%), JPY (1.0%), AUD (0.8%), and CHF (0.5%) leading gains, while Brent crude fell below $100 for the first time in two weeks.

The key question now is whether there is genuine substance behind the headlines or whether optimism fades once again. Trump has continued warning that military action remains possible if Iran rejects US proposals, keeping geopolitical risk elevated. Focus today turns to jobless claims and speeches from Fed officials Daly, Kashkari, and Hammack, ahead of Friday’s non-farm payrolls report.

EUR:

The euro strengthened yesterday, with EURUSD reaching its highest level in over two weeks as equities rallied and oil prices retreated following hopes of Middle East de-escalation. Lower energy prices eased inflation concerns across Europe, while softer dollar sentiment added further support.

Markets also adjusted ECB expectations, now leaning toward two rate hikes this year rather than three. Today’s focus falls on Eurozone retail sales alongside rate decisions in Norway and Sweden, where markets see a 60% chance of a Norges Bank hike and expect the Riksbank to hold steady.

GBP:

Sterling benefited from yesterday’s weaker dollar environment before easing slightly against the euro ahead of today’s UK local elections. While external risk sentiment has supported the pound, domestic political uncertainty remains a key headwind.

Pressure on Keir Starmer has intensified following the Mandelson scandal and weak polling numbers, raising concerns around Labour stability. Markets remain sensitive to any signs of leadership uncertainty, particularly if it increases expectations of looser fiscal policy and renewed pressure on gilt markets.

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