Hormuz headlines keep FX markets hostage

USD

The dollar is holding gains above 99.00 on the DXY, supported by safe-haven demand after US forces struck Iranian missile-launch sites and IRGC vessels in the Strait of Hormuz overnight, even as Secretary of State Rubio said a deal could still materialize within "a few days." The whipsaw in risk sentiment — Monday's sharp dollar sell-off on deal optimism followed by Tuesday's partial reversal — illustrates how binary the geopolitical driver has become, with Khamenei's remarks this morning adding a further layer of uncertainty and pushing Brent back toward session highs. Fed pricing under Chairman Warsh continues to shift hawkish, with markets now virtually certain of a rate increase by December, providing a structural floor for the dollar even on risk-on days.

EUR

EUR/USD dipped below 1.1650 in the Asian session on renewed US-Iran tensions but has since bounced back in European trade, as deal optimism partially reasserted itself. The dominant driver remains the ECB: Schnabel's unambiguous call this morning for a June hike — unconditional on any peace deal — has cemented market pricing for tightening at the 11 June meeting, yet ECB hawkishness is so far failing to lift EURUSD materially, with the Germany-US 10-year spread narrowing to a nine-month low, capping the upside. Rate positioning is caught between a credibly hawkish ECB and a dollar that retains safe-haven demand as long as the Strait of Hormuz remains contested.

GBP

Sterling is the session's underperformer, trading lower against the dollar as UK markets return from a bank holiday to a risk-off tone, with gilt yields falling sharply, reflecting flight-to-quality rather than any domestic catalyst. EURGBP edged higher as the ECB's hawkish pivot gave the euro a relative advantage over a pound that lacks a comparable near-term rate catalyst. UK shop price inflation ticked up to 1.2% in May from 1.0%, a modest acceleration driven by energy pass-through, but insufficient to shift Bank of England expectations materially. With Fed hike expectations rising and the BoE in a data-dependent holding pattern, GBPUSD faces asymmetric downside risk; a credible Iran deal would likely see cable recover, while further escalation risks a test of the lows.

CAD

USDCAD is consolidating , with the loonie caught in a cross-current between rebounding oil prices — Brent back above $98 after Monday's 7% collapse — and a broadly firmer dollar. The Canadian dollar is struggling to benefit from the oil rebound, reflecting the market's skepticism that higher crude prices are durable given the stop-start nature of Iran negotiations; WTI slipped again in European trade as deal optimism partially returned, illustrating the loonie's vulnerability to headline whiplash. Canada's April wholesale sales rose a modest 0.1% month-on-month, providing no independent impetus. Downside in USDCAD looks limited given oil's partial recovery and the loonie's relative underperformance versus other commodity currencies, but a sustained break above 1.3850 would require either a definitive collapse in Iran talks or a further leg higher in the dollar. The outlook is hostage to Hormuz: a deal would likely push USDCAD back toward 1.3750, while prolonged stalemate keeps the pair biased higher.

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