Global Tensions and Policy Shifts

Market Overview

Geopolitical events continue to significantly impact the foreign exchange (FX) markets. The recent escalation in tensions between Iran and Israel has heightened uncertainty in the Middle East, promoting a shift towards safe-haven assets such as gold and the US dollar. This shift has come at the expense of risk-sensitive currencies including the euro and British pound. Moreover, the evolving US-China trade relations have been pivotal, with positive developments enhancing risk appetite and bolstering currencies like the Australian dollar and Chinese yuan. Conversely, adverse news has boosted demand for safe havens such as the Japanese yen and Swiss franc. The ongoing Russian-Ukrainian conflict exacerbates risk-off sentiments, particularly in Europe, affecting the euro, while Middle East unrest and oil price volatility continue to sway currencies linked to oil economies like the Canadian dollar. Additionally, Brexit-related geopolitical events have a profound influence on the British pound, driving volatile shifts based on the progress or setbacks in negotiations.

Currency Highlights

EURO (EUR):

The euro faced downward pressure against the U.S. dollar and British pound following a dovish stance by the European Central Bank (ECB) in its April meeting. By the session's end, EUR/USD dropped by 0.2%, closing at 1.0725, while EUR/GBP fell 0.3% and breached its 50-day moving average to settle at 0.8542.

The ECB, though maintaining current policy settings, clearly signaled an impending shift towards a looser stance due to increased confidence in addressing disinflation. Traders responded by increasing bets on a June rate cut, contrasting with earlier expectations of the Fed initiating its easing cycle in June. This shift has put bearish pressure on EUR/USD. Additionally, the euro might struggle against the pound due to diverging monetary policies, with the Bank of England expected to delay rate cuts until August.

?USD:

The U.S. dollar continued its upward trend for the third consecutive session, pushing the USD Index (DXY) beyond the 106.00 level last seen in early November. This strength was fueled by US inflation figures surpassing estimates, reinforcing the idea of a delayed start to the Federal Reserve's easing cycle, initially expected in June.

Strong economic data, particularly in the labor market, and revised expectations of fewer rate cuts in 2024 have bolstered the dollar. This positive performance coincided with rising US Treasury bond yields, supporting USD bulls and indicating just one or two rate cuts for the remainder of the year.

?GBP:

GBP/USD extended its losses, trading at fresh multi-month lows below 1.2450 despite upward revisions to UK GDP for January. The negative sentiment, along with strength in the USD, contributed to this decline.

Mixed macroeconomic data releases from the US caused the USD rally to lose momentum on Thursday, allowing GBP/USD to edge slightly higher. The decline in EUR/GBP post-ECB policy announcements also benefited GBP, limiting its losses against the dollar. However, ongoing geopolitical tensions and expectations of a steady Fed policy in June could pose challenges for GBP/USD's stability.

JPY:

The Japanese yen experienced renewed selling pressure, dropping to a multi-decade low against the US dollar amid expectations of a delayed Fed rate-cutting cycle. The Bank of Japan's cautious approach and warnings of potential market interventions failed to provide relief to the safe-haven yen.

The divergent policy outlook between the BoJ and Fed continues to favor the USD/JPY pair's upside potential, supported by the Fed's hawkish stance and elevated US Treasury bond yields.

GOLD (XAU/USD):

Gold prices saw some buying interest, halting a slide from recent peaks around $2,431-2,432, driven by concerns over escalating conflicts in the Middle East following Iran's attack on Israel. This geopolitical tension favored the safe-haven precious metal, alongside subdued USD price action.

Expectations of a delayed Fed rate cut, supported by sticky inflation in the US, kept downward pressure on the USD, benefiting gold prices. However, the Fed's hawkish outlook and strong US economic indicators could limit significant gains for gold in the near term.

As we wrap up this week's market update, it's clear that geopolitical events will continue to be a critical driver for the FX market. Traders should remain vigilant, watching for new developments that might influence market sentiment and currency valuations.

Stay tuned for next week's update, where we will continue to provide you with essential market insights. Happy trading!

The weekly market update is published every Monday. If missed due to unforeseen circumstances, it will be posted the following day.

This is for informational purposes only and should not be interpreted as specific investment advice.

While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Past performance does not guarantee future results.

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Special risks are inherent to currency fluctuations, foreign political and economic events

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