Sterling and the euro inched higher against the dollar on Monday, reflecting a modest improvement in global risk sentiment after reports that Iran had offered a proposal to reopen the Strait of Hormuz. The move was cautious, however, with sustained high oil prices and a week packed with central bank meetings tempering broader enthusiasm.
By 07:28 ET (11:28 GMT), GBP/USD had climbed about 0.2%, trading between 1.3505 and 1.3564 for the session, while EUR/USD also gained roughly 0.2%, moving in a range of 1.1697 to 1.1751.
ING strategist Chris Turner described the dollar as starting the week on a "slightly offered footing," as investors positioned for positive developments. Turner noted that the Axios report on Iran’s proposal for the Strait of Hormuz was seen as a welcome step along what remains a difficult road toward a negotiated settlement.
Further support for risk assets arrived after U.S. Senator Thom Tillis cleared the way for a Senate Banking Committee vote on Kevin Warsh’s nomination as Federal Reserve Chair, and following the Department of Justice’s decision to drop its criminal investigation into the Fed’s renovation project. Those developments were cited by market participants as contributing to a firmer tone for risk markets.
Despite the brighter sentiment, Turner urged caution about pushing the dollar significantly lower. With oil prices remaining bid and central banks yet to respond to the recent inflationary shock, ING expects the DXY dollar index to hold near the 98.50 area, describing Monday as likely to be a relatively quiet session.
The focal point for the week is the Federal Open Market Committee decision on Wednesday. ING highlighted the challenge facing the Fed - rising energy prices, persistently elevated inflation and continued strength in consumption and employment - and said the central bank will have to be careful to avoid repeating policy mistakes of 2022. With equities near recent highs, ING anticipates the Fed will signal that rates may need to remain on hold for longer, a position the bank views as mildly supportive of the dollar.
Markets will also watch Thursday’s readings closely, including the core personal consumption expenditures (PCE) inflation print and the initial estimate of first-quarter GDP, which ING said is forecast to rebound to a 2.2% annualised quarter-on-quarter pace from 0.5% in the fourth quarter of 2025.
For the euro, attention centers on Thursday’s European Central Bank meeting. ING pointed out that two-year euro inflation expectations, as derived from inflation swaps, remain above 2.80%. The bank warned that if the ECB appears willing to look through the energy-driven spike in inflation, the single currency could face pressure.
Turner added that a firm warning supporting a June rate hike could help keep EUR/USD around the 1.1700 area through the week.
On sterling, ING’s note contained no specific guidance from the Bank of England, leaving the pound’s near-term direction more dependent on broader dollar moves and overall risk sentiment.
The biggest wildcard identified by ING is USD/JPY. Economists at the firm said markets are underpricing the chance of a Bank of Japan rate increase at Tuesday’s meeting - an outcome that would be a substantial surprise. Should the BoJ lift rates and simultaneously revise inflation forecasts higher while trimming its growth outlook, and should the Fed adopt a hawkish posture on Wednesday, ING argued the ingredients could be in place for USD/JPY to break higher toward this year’s peak near 160.50 and possibly the 2024 high of 162. Such a move would raise the possibility of Japanese foreign exchange intervention.
Market context
- Currency markets reacted to a mix of geopolitical signals and domestic policy developments.
- Oil prices remaining elevated are an important inflationary input that central banks must weigh.
- Major central bank meetings this week - the BoJ, the Fed and the ECB - are the primary near-term catalysts for currency moves.