The United States dollar index (DXY) began the week on a stronger footing, rising 0.5% as geopolitical tensions and resilient inflation data underpinned demand for the greenback.
The move follows a 1.5% decline last week, when optimism around U.S.-Iran negotiations boosted risk appetite. However, sentiment reversed after talks collapsed, with U.S. Vice President JD Vance confirming that negotiations had ended without agreement.
“We have been at it now for 21 hours, and we’ve had a number of substantive discussions with the Iranians. That’s the good news,” he said. “The bad news is that we have not reached an agreement.”
Vance said the key sticking point remained Iran’s refusal to abandon its nuclear ambitions. “We need to see an affirmative commitment that they will not seek a nuclear weapon, and they will not seek the tools that would enable them to quickly achieve a nuclear weapon,” he said. “They have chosen not to accept our terms.”
Last week, minutes from the Federal Reserve’s March meeting reinforced a cautious stance, with policymakers adopting a wait-and-see approach while acknowledging that inflation risks linked to rising oil prices are becoming more balanced.
Recent data highlighted the impact of the conflict on inflation. The U.S. consumer price index (CPI) rose 0.9% in March and 3.3% year-on-year, driven largely by a 10.9% surge in energy costs. Gasoline prices jumped 21.2%, accounting for the bulk of the increase.
Core inflation remained contained, rising 0.2% on the month and 2.6% annually, suggesting underlying pressures are still moderating.
Meanwhile, consumer sentiment deteriorated sharply, with the University of Michigan index falling to a record low of 47.6. Inflation expectations also surged, with households anticipating prices to rise 4.8% over the next year.
EUR/USD - Euro pressured as risk sentiment fades
The euro moved lower at the start of the week, reversing part of last week’s 1.8% gain as risk sentiment deteriorated following the breakdown in ceasefire negotiations.
Tensions escalated further after U.S. President Donald Trump floated a proposal to impose tolls on vessels transiting the Strait of Hormuz.
The European Commission rejected the idea, reiterating that international law guarantees freedom of navigation.
“International law provides for the freedom of navigation, which means what? It means no payment or toll whatsoever,” a Commission spokesperson said. “The Strait of Hormuz, like any other maritime lane, is a public good for all humanity, which means navigation must be free.”
The renewed geopolitical friction supported the U.S. dollar while weighing on the euro.
AUD/USD - Aussie retreats as risk appetite weakens
The Australian dollar fell 0.5% to 0.7021, giving back part of last week’s 2.5% rally as hopes for a ceasefire faded.
The currency remains sensitive to shifts in global risk sentiment, with heightened Middle East tensions prompting a move away from risk-linked assets.
Although U.S. core inflation remained subdued, elevated headline inflation driven by energy prices continued to underpin the U.S. dollar, limiting upside for AUD/USD.
GBP/USD - Sterling slips amid geopolitical uncertainty
Sterling declined 0.5% after posting gains of around 2% in the previous week, as geopolitical tensions and energy market disruptions weighed on sentiment.
Reports over the weekend suggested that the UK government would not participate in any U.S.-led blockade of the Strait of Hormuz, instead backing international efforts to preserve freedom of navigation.
A government spokesperson said: “We continue to support freedom of navigation and the opening of the Strait of Hormuz, which is urgently needed to support the global economy and the cost of living back home.”
Prime Minister Sir Keir Starmer reiterated the importance of a coordinated international response, with the UK working alongside allies to ensure stability.
Market expectations for Bank of England tightening in 2026 have edged higher, with traders pricing in further rate increases later in the year.
USD/JPY - Yen steadies as intervention risks loom
USD/JPY traded near 159.72, holding just below the key 160 level that previously triggered intervention from Japanese authorities.
The pair remains range-bound as traders weigh geopolitical risks and inflation dynamics against the likelihood of official intervention.
Rising oil prices have complicated the yen’s outlook by increasing import costs, while broader uncertainty has supported the U.S. dollar.
Bank of Japan Deputy Governor Ryozo Himino acknowledged the policy challenges posed by prolonged geopolitical tensions, noting the risk of slower growth alongside rising inflation.
Economic Calendar Week Ahead
On Monday, markets will look to comments from Bank of Japan Governor Kazuo Ueda, alongside Chinese credit data and Canadian building permits.
Tuesday brings U.S. existing home sales, the NFIB business optimism index and producer price data. In Australia, attention will turn to consumer and business confidence and remarks from Reserve Bank of Australia officials, while UK retail sales data is also due.
On Wednesday, investors will monitor speeches from several Federal Reserve policymakers, alongside U.S. manufacturing indicators, European industrial production and Japanese machinery orders.
Thursday is the busiest session, with Australian employment data, Chinese GDP and activity figures, UK growth and production data, and key U.S. releases including the Philadelphia Fed index and industrial production. The Federal Reserve’s Beige Book will also be published.
On Friday, focus will shift to central bank commentary from the Reserve Bank of Australia and Federal Reserve officials, alongside Canadian housing data and European external balances.
Markets will also be monitoring the start of U.S. earnings season, set to kick off during Monday's session with quarterly results from financial heavyweight Goldman Sachs.
