Sterling and the euro both weakened on Tuesday while the dollar remained firm, leaving foreign exchange markets in a cautious holding pattern as investors parsed diplomatic developments and a high-profile Federal Reserve leadership hearing.
At 08:50 ET (12:50 GMT), GBP/USD was trading down 0.14% at 1.3510, and EUR/USD was off about 0.3% at 1.1758. The moves came as markets displayed a modestly improved risk tone following reports that Iranian negotiators are expected to travel to Pakistan to confer with US officials, a signal that the current ceasefire could be extended.
Despite those encouraging reports, investors remained attentive to the prospect of the ceasefire expiring tomorrow, and President Trump’s persistent warnings of a binary outcome - either a deal or destruction - kept some risk appetite in check.
The primary market focus for the session was Kevin Warsh’s confirmation hearing before the Senate scheduled for 16:00 CET. Market commentary from analysts at ING reflected a consensus expectation that Warsh may adopt a dovish stance on the policy rate while signalling hawkish intent on reducing the Fed’s balance sheet. ING noted that any remarks that push short-dated swap rates and real rates lower would likely be dollar-negative.
ING’s Chris Turner urged caution on the potential scale of moves, pointing out that a Republican Senate faction could still block the nomination from moving to a full vote. Turner's note suggested that the US dollar index (DXY) could edge toward the 97.50/60 area depending on how events unfold during the day.
The euro traded in a narrow band between roughly 1.1750 and 1.1800 against the dollar, supported in part by data indicating that non-resident buyers acquired €280 billion of eurozone assets in the first two months of the year. On the economic calendar, the German ZEW investor survey and a set of ECB speakers were due during the morning session.
Market-implied probabilities currently assign a 68% chance to an ECB rate increase in June, and ING expects the central bank to follow through with a hike to underpin its inflation-fighting credibility. ING added that if Warsh adopts a distinctly dovish tone at his hearing, EUR/USD could extend toward 1.1850.
Sterling was absorbing a stream of domestic political noise but showed relative resilience. UK government bonds underperformed on Monday amid speculation about a possible change in Labour leadership, yet the pound held up despite that volatility.
Attention in the UK shifted to parliamentary testimony from a senior civil servant dismissed over the Mandelson betting affair. Political risk appears contained for the moment: prediction markets assign only a 39% probability that Prime Minister Keir Starmer will leave office by June. EUR/GBP was expected to find support in the 0.8685-0.8700 area.
Market participants also watched incoming US data, with March retail sales and the weekly ADP employment report on the schedule. ING noted that any unexpectedly weak readings in those releases would act as additional headwinds for the dollar.
In summary, currency markets are likely to remain driven by three threads - the outcome of the Warsh hearing, developments around the Middle East ceasefire discussion, and comments from ECB officials on the pace of policy normalisation - with investors remaining alert to incoming economic data that could shift the balance of risk.