Currency markets experienced heightened volatility on Tuesday as geopolitical tensions in the Middle East intensified, particularly with Israel launching a fresh wave of strikes on Tehran and US-aligned Gulf states, including Saudi Arabia, signaling possible direct involvement in the Iran conflict [2][3][4][5]. US President Donald Trump announced a five-day pause in US attacks on Iranian energy infrastructure, citing productive talks with Tehran, though Iranian officials, including Foreign Minister Abbas Araghchi and Parliament Speaker Mohammad Bagher Ghalibaf, denied any negotiations with Washington [3][4][5]. Senior Iranian military adviser Mohsen Rezaei stated that the conflict would persist until Iran receives full compensation for damages [3][4].
The US Dollar (USD) strengthened across major pairs, supported by safe-haven demand amid the risk-off mood and rising US Treasury yields [1][3][4][5]. The USD/JPY pair climbed to the 158.75-158.80 region, rebounding after a previous pullback, as the Japanese Yen (JPY) weakened on softer-than-expected inflation data, which fell below the Bank of Japan's (BoJ) 2% target and reached its lowest level since March 2022 [1]. This reduced expectations for an immediate BoJ rate hike, dampening JPY's upside [1][2]. Technical analysis showed USD/JPY holding above the 100-period EMA on the 4-hour chart, with initial support at 158.20 and resistance at 159.30, 159.80, and the 160.00 psychological barrier [1].
EUR/JPY softened below 184.00, trading near 183.85, as Middle East tensions boosted safe-haven flows into the JPY, though the pair remained above the key 100-day EMA at 181.70, maintaining a mildly bullish bias [2]. The RSI at 52.71 indicated modest positive momentum, with immediate support at 183.50 and resistance at 184.70 and 185.80 [2]. USD/CHF rebounded toward 0.7900, benefiting from safe-haven demand for the USD as the conflict escalated [3].
Risk-sensitive currencies underperformed. GBP/USD declined to near 1.3400, with the British Pound (GBP) being the weakest against the USD, as risk aversion increased and the Bank of England (BoE) kept rates steady at 3.75% [4]. BoE Governor Andrew Bailey warned that the Middle East conflict would shock the economy and push up inflation, emphasizing the importance of restoring safe shipping through the Strait of Hormuz [4]. The Australian Dollar (AUD) traded 0.6% lower to near 0.6760, pressured by Iran's denial of peace talks and weak preliminary Australian PMI data for March, with the Composite PMI falling to 47.0 from 52.4 in February, indicating contraction [5]. The US Dollar Index (DXY) rose 0.25% to near 99.40 [5].
Market participants awaited key economic data releases, including flash S&P Global PMI figures for the US, UK, and Australia, as well as Swiss ZEW Survey and SNB Quarterly Bulletin [3][4][5].
CONCLUSION
Escalating tensions in the Middle East and conflicting reports on US-Iran negotiations have driven risk aversion, strengthening the US Dollar and weakening risk-sensitive currencies like GBP and AUD. Mixed economic data, particularly soft inflation in Japan and contracting PMI in Australia, further shaped currency movements. The market impact is high, with traders closely watching upcoming economic releases and geopolitical developments for further direction.