Currency markets entered the week with investors weighing geopolitical risk against central bank expectations, creating a more cautious backdrop for sterling, the dollar and the euro.
The pound remains under pressure after a week in which external developments played a central role in market direction. Headlines around potential US and Iran peace talks helped sterling recover modestly against the dollar late in the week, but the broader picture remains fragile. GBP/USD still recorded a weekly decline after touching lows of 1.345 and opened the new week slightly firmer around 1.353. At present, sterling remains vulnerable to changes in sentiment, particularly while geopolitical uncertainty continues to influence demand for defensive currencies.
The Bank of England’s forthcoming interest rate decision is now a central focus for GBP/EUR, which opened just above 1.15. The Monetary Policy Committee is widely expected to leave rates unchanged, but the tone of its communication may prove more important than the decision itself. Markets are currently pricing in at least two rate hikes before the end of the year. Should the Bank push back against those expectations, sterling could face renewed pressure.
The dollar has gained support as US and Iran negotiations appeared to stall again. Oil prices moved higher, with Brent crude rising by nearly 2% and US crude gaining around 1%. This combination of geopolitical uncertainty and firmer energy prices is likely to provide near-term backing for the US dollar.
Domestic US factors are also set to influence sentiment. Earnings updates from major companies including Amazon and Apple are expected to attract market attention. Strong results could offer further support to the dollar by reinforcing confidence in US assets at a time when global uncertainty remains elevated.
The euro has started the week in a stronger position, gaining against both sterling and the dollar. EUR/USD moved more than 0.2% higher on Monday morning and pushed further into the 1.17 range. Against sterling, the wider outlook is also shifting, with consensus forecasts increasingly pointing towards gradual pound weakness.
Despite higher oil prices, which would normally provide support, CAD has struggled to benefit. Market sentiment has become more bearish as domestic fundamentals weigh on the currency. Slower growth, softer housing conditions and weakness in the labour market are all limiting confidence. The Bank of Canada is expected to remain on hold this year, which further restricts the currency’s upside. This leaves CAD at a disadvantage against currencies supported by central banks that are maintaining tighter or more hawkish policy positions.
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