Geopolitical risks keep FX markets on edge

USD

The dollar held a relatively firm tone through Monday’s Asia and early European trade, supported by ongoing geopolitical risk and a modest bid for liquidity. Price action was relatively contained in G10, but the USD remained underpinned against most risk‑sensitive currencies as markets continued to react to the latest escalation in Middle East hostilities. Ongoing disruption risks around key oil shipping routes have kept energy prices elevated, reinforcing inflation concerns and limiting the scope for a clean dovish repricing of the Fed.

Looking ahead, today’s data calendar is relatively light, with the NAHB housing index and TIC flows unlikely to materially shift the narrative. Instead, we expect geopolitical headlines to remain the dominant driver, consistent with our recent week‑ahead view that FX is currently trading in a “fragile stability” regime where event risk trumps macro data. We continue to think USD downside is constrained near term, with safe‑haven demand likely to re‑emerge on any escalation in the Middle East, even as the medium‑term bias remains for a softer dollar.

EUR

EUR/USD edged modestly higher in early trading but remains within recent ranges, with underlying price action continuing to reflect a balance between USD resilience and EUR‑specific headwinds. The single currency has struggled to build sustained upside momentum, with higher energy prices linked to Middle East tensions weighing on the Eurozone’s terms of trade and growth outlook. This dynamic has been a consistent theme in our recent commentary, and we continue to view the euro as vulnerable when geopolitical risk premia rise.

Into today, the focus shifts to second‑tier data and ECB speaker flow, but these are unlikely to challenge the broader narrative. With markets increasingly sensitive to energy supply disruption risks, we expect EUR/USD to remain reactive to oil prices and geopolitical developments rather than domestic data surprises. Our near‑term bias remains for range‑bound trading with a downside skew, particularly if hostilities intensify or if markets further reprice inflation risks linked to sustained elevated crude prices.

GBP

Sterling outperformed modestly into the European open, with GBP/USD trading higher alongside broader risk assets, although gains remain fragile. Recent price action has been choppy, reflecting a complex mix of domestic resilience and political uncertainty, alongside broader global risk sentiment. While UK growth data has been relatively supportive in recent weeks, political noise and rising gilt yields continue to cap investor confidence, as highlighted in our recent data‑reactive notes.

Today’s focus is primarily on Bank of England speakers, with markets looking for further guidance around the policy path amid persistent inflation risks. However, the external backdrop is likely to dominate. In particular, ongoing Middle East tensions continue to create a binary risk environment where sterling behaves as a higher‑beta currency. We maintain the view that GBP remains vulnerable in a sustained risk‑off scenario, with downside risks likely to re‑emerge quickly if geopolitical stress intensifies or if global equity sentiment deteriorates.

CAD

The Canadian dollar has remained relatively stable, with USD/CAD holding near recent ranges despite elevated oil prices. Typically, higher crude prices would provide stronger support to CAD, but this relationship has been less consistent in recent sessions, reflecting broader USD demand and cautious positioning. The impact of Middle East hostilities has been a key factor here, with oil markets bid on supply concerns while FX markets remain more focused on global risk sentiment and liquidity demand.

Today sees limited domestic drivers, with Canadian markets also impacted by a local holiday, suggesting thinner liquidity conditions. As such, USD/CAD is likely to remain externally driven, with oil price dynamics and geopolitical headlines the key catalysts. Our near‑term view is for continued consolidation, but with asymmetric risks: sharper escalation in the Middle East could drive a more pronounced risk‑off move, ultimately favouring USD strength despite supportive terms of trade for CAD.

Disclaimer

This information has been prepared by Monex International Markets plc, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.