Major currency pairs experienced heightened volatility at the start of the week as renewed geopolitical tensions in the Middle East and a series of key economic data releases influenced market sentiment. GBP/USD rebounded toward 1.3530, recovering from an initial drop after the US seized an Iran-flagged vessel and Iran threatened to halt talks in Pakistan. The pair traded at 1.3525, up 0.13%, as the US Dollar Index (DXY) softened by 0.05% to 98.17 after hitting a six-day high of 98.39 on the back of the geopolitical news [1][3]. West Texas Intermediate (WTI) Oil surged nearly 3.90% to $87.37 per barrel amid supply concerns and the shutdown of the Strait of Hormuz, adding to global inflationary pressures [1].
In Canada, inflation accelerated in March, with the Consumer Price Index (CPI) rising 0.9% month-over-month and 2.4% year-over-year, both below market expectations of 1.1% and 2.5%, respectively. Core CPI rose 0.2% MoM and 2.5% YoY. The USD/CAD pair extended its six-day slide, trading around 1.3663, as the softer US Dollar and underwhelming Canadian inflation data weighed on the Greenback and supported the Canadian Dollar. RBC Economics noted that the Bank of Canada (BoC) is likely to maintain a cautious stance, with slower core price growth providing flexibility amid a soft economic backdrop and elevated unemployment [2].
Political risks and a busy data calendar are also in focus for the UK, with upcoming employment, CPI, PMI, and retail sales data. Domestic political uncertainty is heightened by speculation around PM Keir Starmer's leadership, as reports suggest potential moves to oust him. Market participants are reassessing risks related to UK fiscal prudence, and the S&P Global survey showed British consumer morale at its lowest since mid-2023, with sentiment falling to 42.3 from 44.1. More than half of respondents expect a Bank of England rate hike [1][3]. Technically, GBP/USD is seen as range-bound between 1.3480 and 1.3580, with support in the mid-to-lower 1.34s [3].
In the eurozone, attention is on a series of business and investor surveys, including the German ZEW, eurozone PMIs, and the Ifo index. European Central Bank (ECB) officials signaled readiness to hike rates if necessary but prefer to wait, leading markets to price out an April hike and assign a roughly 50% probability to a June hike, which ING expects. ING sees a steady state for EUR/USD closer to 1.17. March business surveys were not as negative as anticipated, and markets are watching for further deterioration [4].
Looking ahead, investors are closely monitoring developments in the US-Iran situation, particularly the potential reopening of the Strait of Hormuz as the current two-week ceasefire is set to expire on Wednesday. US President Donald Trump stated it is "highly unlikely" he will extend the ceasefire and that the Strait will not reopen until a deal is signed, though he is willing to meet with Iranian leaders if a breakthrough occurs [2].
CONCLUSION
Currency markets are being driven by a combination of geopolitical risks, notably in the Middle East, and mixed economic data from major economies. While the US Dollar has softened after an initial surge, commodity prices and inflation data are adding to volatility. Central bank policy outlooks remain cautious, with upcoming data and political developments likely to shape near-term market direction.