Currency markets remained cautious on Tuesday as geopolitical tensions in the Middle East, particularly around the Strait of Hormuz, continued to support the US Dollar and drive volatility in energy prices. The New Zealand Dollar (NZD/USD) traded around 0.5880, virtually unchanged with a 0.03% decline, as safe-haven demand for the US Dollar increased amid ongoing uncertainty over negotiations between Iran and Oman regarding the reopening of the strategic waterway. Qatar reported that talks were at an advanced stage but at a critical juncture, with Tehran maintaining several conditions for reopening, including the payment of war reparations by Washington and the lifting of sanctions. Iran has also ruled out direct negotiations with US President Donald Trump before the end of his term in January 2029 [1].
Oil prices remained elevated, with West Texas Intermediate (WTI) trading around $82.10, more than 6% higher since the start of the week, supporting higher US Treasury yields and fueling expectations of further monetary tightening by the Federal Reserve. The CME FedWatch tool indicated a 50% chance of a 25-basis-point rate hike at the September meeting, up from 42% on Friday, with Cleveland Fed President Beth Hammack stating that current policy is not sufficiently restrictive and that several rate hikes could be necessary to bring inflation back to target [1].
The British Pound (GBP/USD) held near 1.3508, nearly unchanged, as traders awaited key US inflation data and UK GDP releases. Energy prices, while high, retreated on headlines suggesting progress in US-Iran negotiations, with WTI falling from $84.69 to $82.50. Market participants expected US headline CPI to come in at 3.4% YoY in July, a tenth lower than June, and core CPI to drop to 2.5% YoY. Money markets put the odds of a Fed rate hike in September at 52%, according to Prime Terminal data. Analysts noted that the Pound was unaffected by the election of Andy Burnham as the UK’s new Prime Minister and anticipated little movement ahead of Britain's budget in late October [2].
The Canadian Dollar (USD/CAD) traded around 1.3930, near a two-month low, as oil price volatility continued to influence the pair. WTI traded around $81.50, down from an intraday high of $83.57 but still up more than 5% for the week. TD Securities expects the Bank of Canada to stay on hold at 2.25% through 2026, with oil price shocks introducing inflation risks but the bank remaining patient as it monitors geopolitical developments and domestic CPI [3].
EUR/GBP traded near 0.8540, with bearish pressure mounting due to sentiment driven by the Iran blockade of the Strait of Hormuz and the US counterblockade of Iranian ports. The cross remained in the red for a second consecutive day, with technical analysis indicating a mildly bearish near-term bias. The main upcoming catalysts for the cross are the German HICP on Wednesday and the UK GDP on Thursday [4].
Across all markets, traders are focused on the upcoming US Consumer Price Index (CPI) release on Wednesday, which is expected to provide further clarity on the Federal Reserve’s interest rate path. Developments in the Middle East and oil price swings remain key drivers of market sentiment and currency movements.
CONCLUSION
Currency markets are trading cautiously as geopolitical tensions in the Middle East and volatile oil prices drive expectations for tighter monetary policy, particularly in the US. With key inflation data due from the US and UK, and ongoing negotiations over the Strait of Hormuz, traders are likely to remain on edge, awaiting further clarity on central bank actions and geopolitical developments.