FX markets are starting the session with a clear dollar bias, as higher US yields, softer risk appetite and renewed policy divergence push the greenback to the front of the pack. The move has left EUR/USD under fresh pressure below 1.14, dragged GBP/USD beneath 1.32 and helped GBP/EUR break through the heavily watched 1.16 area, with investors favouring the dollar as both a yield and defensive play.

The move has been building since the Fed’s June meeting, where rates were held at 3.50% to 3.75% and the previous easing bias was effectively removed. Markets have since shifted towards a higher-for-longer US rates narrative, with the dollar emerging as the cleanest expression of that repricing.

FX markets open with sterling in the spotlight, as investors look past UK political drama and instead focus on the prospect of a swift, orderly leadership transition. The pound has rallied across the board, supported by lower gilt yields and a reduced near-term political risk premium.

The wider market tone remains more cautious. Global equities are under pressure, the Fed continues to lean hawkish, and the dollar is still benefiting from resilient US data and sticky inflation risks. In Europe, softer ECB messaging has left the euro vulnerable, with EUR/USD edging closer to a potential test of 1.14.

Weekend talks between the US and Iran in Switzerland gave markets another reason to look past the worst-case scenario, with both sides describing the opening round as constructive and signalling a willingness to continue negotiations this week. The Strait of Hormuz remains central to the story, while the Israel-Lebanon conflict still threatens progress towards de-escalation.

For FX, however, the geopolitical impulse is fading. After weeks of softer rhetoric, much of the good news looks priced in. Investors are shifting back to inflation, oil and policy rates, with hawkish central banks and rate differentials once again setting the tone.