FX Market Update: Dollar Slides on Softer Data and Risk Rally, Sterling Extends Gains, Euro Holds Firm.

USD – Softening as improving risk sentiment and weaker-than-expected inflation data weigh on the dollar, with markets increasingly confident the macro impact of the conflict will be limited.

EUR – Holding a position of relative strength, supported by steady ECB rate expectations and resilience in the face of improving global risk appetite.

GBP – Strengthening in the near term, with sterling extending gains, though upside may be capped by more cautious Bank of England guidance.

USD:

The dollar has come under pressure as markets signal growing confidence that the geopolitical situation will have minimal lasting economic impact. Risk assets have rebounded strongly, with the S&P 500 now trading above its February levels and oil prices falling sharply, reinforcing the shift away from safe-haven demand. Despite the ongoing closure of the Strait of Hormuz and a US naval blockade, expectations for further talks are helping anchor optimism.

Recent US data has also weighed on the dollar. PPI inflation surprised to the downside, with the headline figure printing at just 0.5% versus expectations of 1.1%, while the NFIB small business index declined more than anticipated. These releases have eased pressure on the Federal Reserve and reduced the urgency for tighter policy. Focus now turns to the Fed’s Beige Book, which may provide further insight into underlying economic conditions ahead of the next rate decision.

EUR:

The euro continues to show resilience, holding close to pre-conflict levels as the dollar softens. Support is underpinned by stable expectations for European Central Bank policy, with markets still pricing in at least two rate hikes this year despite improving global risk sentiment.

Attention today is firmly on a packed schedule of ECB speakers at the IMF meetings, including Cipollone, Villeroy, Lagarde, and Schnabel. Their commentary will be key in determining whether policymakers validate current market pricing. For now, the euro appears well-supported, though further upside may depend on confirmation of the ECB’s tightening bias.

GBP:

Sterling has been one of the stronger performers in recent sessions, extending its rally to seven consecutive days and gaining around 3% since late March. The move has been driven in part by broader dollar weakness, but also reflects relative resilience in UK rate expectations.

However, Bank of England Governor Bailey struck a cautious tone in recent remarks, avoiding firm guidance and prompting markets to scale back expectations to just one fully priced rate hike this year. Bailey is due to speak twice more today at the IMF meetings, and any further signals on policy direction will be closely watched. While momentum remains positive for now, a more cautious central bank stance could limit further gains.

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