FX market news

The defining factor for the markets continues to be geopolitics and the fluctuations in crude oil prices caused by tensions between the US. and Iran:

• Currencies have fluctuated in response to news about the blockade of the Strait of Hormuz and the successive tensions and hopes regarding a possible agreement and fragility of the ceasefire (see more).
• Oil has acted as a barometer. Risks of potential renewed war tensions pushed Brent prices above 115 USD/bbl in late April, then briefly dipped below 100 and now are consolidating in the 100-105 USD/bbl range (see more).

However, following the ceasefire and despite upward pressure on global energy prices, the USD has lost some ground, falling from the highs, near 99, reached by the USD Index (DXY) on April 29 to current levels around 98 (see more). Thus, the USD was among the G10 currencies that performed the worst during this period.

• At a second level, attention has also focused on economic data. The US shows relative strength in both growth and employment, although the details of these data still leave some doubt. This contrasts with the weaker dynamics in European confidence indicators (see more), since the energy shock has a greater impact.
• The April meetings held by the Federal Reserve and the ECB, as well as those of the other major central banks (BoE and BoJ), confirmed the pause in monetary policies (maintaining interest rates), with a cautious tone while waiting to see how geopolitical instability evolves and how the war impacts the cycle. The impact of the decisions on the FX market was limited (see more).

The EURUSD pair remained in recent ranges, maintaining its negative correlation with oil. The pair tested levels slightly below 1.17 amid negative geopolitical news and rising crude oil prices, and rebounded close to 1.18, driven by market optimism about a possible agreement and due to the ceasefire between Russia and Ukraine.

The market will continue to monitor the negotiations and the responses from Iran and the US to the peace proposals, and especially the possible reopening of the Strait of Hormuz. A prolonged close would maintain the bullish bias in the USD (bearish in EURUSD) and in energy prices (see more). Conversely, firmer steps towards a possible agreement would weigh on the dollar. Despite this, after recent movements, we see limited downside risks for the USD, which involves limited upside potential for EURUSD in the short term.

The importance of macroeconomic publications will continue to grow, especially regarding inflation dynamics while energy prices and global supply chains remain affected. Upward pressure on prices could trigger rate increases and currency movements.

The ECB will reassess its scenario in June, with a possible rate hike on the table. In the US, the transition of the Fed's leadership (Kevin Warsh replacing Jerome Powell) could alter how the central bank communicates, with an uncertain impact on the FX market (see more).