Sterling and the euro fell against the US dollar on Tuesday as markets reacted to fresh developments in the Gulf and prepared for a packed central bank calendar. Iran's proposed interim ceasefire, which would reopen the Strait of Hormuz while postponing nuclear talks, met with a cool reception in Washington. That reaction lifted oil prices and revived risk-off considerations that have rippled through currency markets.
At 08:35 ET (12:35 GMT), GBP/USD was down 0.5% at 1.3476, while EUR/USD had slipped 0.3% to 1.1691. The larger backdrop, however, did not deliver a straightforward boost to the dollar. Market participants noted the greenback has been unable to convert the weak risk tone into sustained gains.
Analysts at ING highlighted two principal factors limiting dollar momentum. First, US equity markets have shown unusual resilience, and corrections elsewhere remain contained. ING emphasised that EUR/USD presently exhibits a stronger correlation to global equities than to either oil moves or short-term rate differentials, weakening the classic safe-haven bid for the dollar. Second, month-end rebalancing flows are creating a mechanical headwind for the dollar because of US equity outperformance through April.
Those conditions have encouraged a rotation into higher-beta commodity-linked currencies. The Australian dollar, New Zealand dollar, Norwegian krone and Canadian dollar have attracted flows as investors chase carry and cyclical exposure. ING cautioned, however, that these positions are vulnerable to corporate results from major US technology companies due to the outsized sensitivity of US equity indices to earnings updates relative to geopolitical headlines. Alphabet, Microsoft, Amazon and Meta were cited as upcoming earnings that could influence sentiment.
ING's analysis suggests that when month-end flows abate, dollar appreciation could quicken - unless substantive progress materialises in Gulf negotiations. For the immediate session, the market's attention will also include US consumer confidence data. With a Federal Open Market Committee decision due on Wednesday, many traders are expected to adopt a wait-and-see stance, keeping volatility in dollar currency pairs somewhat contained.
In Asia, the Bank of Japan's policy decision met expectations but signalled notable division among policymakers. The BoJ held its policy rate at 0.75%, as anticipated, but the 6-3 split in the vote was the most divided since Kazuo Ueda assumed the governorship. ING interpreted the split as a sign of growing momentum toward further policy normalisation. Markets are now placing a 74% probability on a BoJ rate increase at the June 16 meeting, an outcome that traders will watch closely for its implications on USD/JPY later in the week.
For the euro, the European Central Bank's meeting on Thursday is the primary near-term risk. ING noted that EUR/USD is trading roughly 0.5% below its short-term fair value estimate. Supportive rate differentials and the relative strength in equities have helped offset the drag from higher oil prices. Market-implied rate expectations have moved more hawkish over the past week, effectively raising the bar for the ECB to match. ING does not expect the Governing Council to resist a summer rate hike, but a cautious commentary could disappoint markets. ING added that a material dovish surprise would be required to push EUR/USD sustainably below the 1.1700 level, unless optimism about a Gulf resolution weakened further.
Sterling's path this week was described as largely contingent on broader dollar dynamics and overall market risk appetite. With no immediate Bank of England action expected to provide a directional catalyst, sterling's moves are likely to track developments in the greenback and shifts in investor sentiment tied to geopolitical and earnings-related news.
Market context and near-term focus:
- Oil price strength after the tepid Washington response to Iran's ceasefire proposal has reintroduced uncertainty.
- The dollar's inability to capitalise reflects resilient US equities and mechanical month-end outflows tied to US equity outperformance.
- Traders will monitor US consumer confidence and Wednesday's FOMC decision, with Thursday's ECB meeting and potential BoJ policy moves also central to near-term FX direction.