The collapse of negotiations between the United States and Iran in Islamabad, confirmed by US Vice President JD Vance, has heightened geopolitical tensions and triggered a spike in oil prices, impacting currency markets [1][2]. US President Donald Trump announced plans to blockade ships entering or leaving the Strait of Hormuz, and the US Central Command will begin operations targeting maritime traffic linked to Iranian ports, further increasing market concerns [1]. As a result, EUR/JPY traded around 186.65 on Monday, down 0.08%, with risk aversion prompting investors to reduce exposure to risk-sensitive assets [1]. Japan’s 10-year government bond yield rose to approximately 2.47%, supported by higher oil prices following the breakdown of talks [1]. On the Japanese side, expectations for a near-term tightening of monetary policy by the Bank of Japan have strengthened, with the next policy decision scheduled for April 28 [1].
For EUR/USD, ING’s Chris Turner notes that the pair was pressured in Asia by higher oil prices after the failed peace talks but is holding above 1.1600 [2]. Turner highlights Hungary’s pro-EU election outcome as supportive for the Euro, suggesting that 1.1700 is a comfortable near-term level for EUR/USD, with June European Central Bank (ECB) rate hike expectations remaining intact [2]. Economists at Societe Generale also argue that upside risks to core inflation justify bringing forward the ECB rate-hike cycle, now expecting two 25-basis-point increases in June and September [1]. Currently, 22 basis points are priced in for the June ECB meeting [2].
Despite the geopolitical uncertainty, the European monetary front remains focused on potential ECB tightening. The economic calendar is light at the start of the week, leaving geopolitical developments in the Middle East at the center of market attention [1][2]. Investors are also watching remarks from ECB President Christine Lagarde and other ECB speakers, which could provide further clues about upcoming monetary policy decisions [1][2].
According to ING, the fact that the Iranian delegation attended the talks and that there has not been renewed destruction of energy infrastructure has limited the downside for EUR/USD and prevented equity markets from falling further [2]. The Sakura Report in Japan indicates that all nine regions consider their economies to be either 'recovering moderately', 'picking up', or 'picking up moderately' [1].
CONCLUSION
The failed US-Iran talks have increased geopolitical risks and pushed oil prices higher, impacting both EUR/JPY and EUR/USD. While risk aversion has weighed on the Euro, pro-EU political developments in Hungary and persistent ECB rate hike expectations are providing some support. Market participants remain focused on upcoming central bank decisions and further geopolitical developments.