FX markets hold steady as geopolitics keeps the dollar supported.

Market overview

FX markets are starting the day with a cautious tone, as geopolitical risk, firmer oil prices and a softer risk backdrop continue to shape price action. The dollar remains well supported near recent highs, sterling is still benefiting from favourable yield dynamics, and the euro is struggling to find the momentum needed to break higher.

The key theme for markets is the return of safe-haven demand. Renewed tensions around the Strait of Hormuz have lifted oil prices and weighed on sentiment, helping the greenback hold firm despite last week’s softer US labour market data. With the economic calendar relatively quiet, investors are leaning more heavily on geopolitical headlines and positioning rather than fresh macro signals.

USD: Safe-haven demand keeps the greenback underpinned

The US dollar is consolidating close to one-year highs, holding just above the 21-day moving average near 100.700. While last week’s jobs report came in weaker than expected, the broader dollar uptrend remains intact, helped by a still-hawkish Federal Reserve narrative and a more defensive tone across markets.

Fresh US strikes on Iranian targets, following attacks on commercial shipping in the Strait of Hormuz, have reinforced demand for the dollar as a safe-haven asset. The move higher in oil prices has also reminded markets that geopolitical risks remain unresolved.

That said, the dollar is not without vulnerabilities. President Trump’s renewed comments on Greenland, further tariff threats and earlier criticism of the Fed all point to policy risks that could regain market relevance later in the year. For now, however, geopolitical uncertainty appears to be outweighing Washington-related concerns.

The FOMC minutes are due later today. Although they are likely to retain a hawkish tone, this is already well priced by markets. With oil prices having eased from recent peaks after the interim US-Iran peace agreement, the minutes may feel slightly dated. We expect the release to keep the dollar supported, but not necessarily drive a meaningful fresh leg higher.

GBP: Sterling supported by yield appeal, but gains look stretched

Sterling remains underpinned by a more stable UK political backdrop and favourable rate differentials. Investors appear increasingly comfortable that the post-Starmer transition may prove less disruptive than initially feared, particularly with signs that a potential Andy Burnham government would broadly preserve the existing fiscal framework.

Domestic political noise has not disappeared. Nigel Farage’s decision to resign as an MP and trigger a by-election has added fresh theatre to UK politics, although the market impact has so far been limited. Investors remain more focused on government continuity than electoral spectacle.

Against the dollar, sterling has slipped from recent three-week highs as renewed disruption in the Strait of Hormuz dented risk appetite. GBP/USD continues to trade largely as a function of global sentiment and dollar direction, rather than domestic UK developments.

The more striking move remains in GBP/EUR, where sterling has continued to outperform. UK yields remain comfortably above eurozone equivalents, and with volatility low, investors have been more willing to pursue carry trades. This has helped push GBP/EUR above 1.17, a fresh one-year high.

However, the rally now looks increasingly mature. With the daily relative strength index around 73, GBP/EUR is firmly in overbought territory, suggesting further gains may be harder to sustain in the near term.

EUR: Euro struggles for direction as yield pressures build

EUR/USD remains subdued just above 1.14, with few clear catalysts this week to trigger a decisive breakout. The pair continues to lack momentum, and a move above resistance near 1.1460 looks challenging unless the dollar loses traction.

NATO members have gathered in Ankara, where they are expected to formalise higher defence spending commitments in response to long-standing US pressure. Against a more unstable geopolitical backdrop, and following the recent reduction of US military assets in Europe, allies have announced at least $50 billion in additional defence spending.

This theme could place upward pressure on long-end eurozone yields in the months ahead, as investors pay closer attention to public finances and rising fiscal commitments. Ten-year yields across major European economies rose by as much as 5bp yesterday, although part of the move likely reflected the oil price reaction to renewed tensions around the Strait of Hormuz.

For now, EUR/USD looks more likely to retest 1.14 than break above 1.1460, particularly if the FOMC minutes reinforce the Fed’s hawkish stance.

Looking ahead

• FOMC minutes are the main scheduled event, although the message may already be priced in.

• Dollar support should remain intact while geopolitical risks continue to drive safe-haven demand.

• EUR/USD may struggle to clear 1.1460 without a softer dollar catalyst.

• GBP/EUR remains supported by yield differentials, but overbought signals suggest the rally may slow.

• Oil prices and headlines from the Strait of Hormuz remain key near-term drivers for broader risk sentiment.