Currency outlook: Middle East uncertainty continues to stoke currency market volatility

Euro

EUR/GBP: Down from £0.87 to £0.86

EUR/USD: Up from $1.15 to $1.11

The euro trended broadly higher through the first half of April, underpinned by hawkish European Central Bank (ECB) policy bets and hopes that Hungary’s new administration will pursue a less antagonistic relationship with the EU.

EUR sentiment was then moderated through the latter half of the month amid lacklustre GDP and PMI figures, and the European Central Bank’s (ECB) decision to leave interest rates on hold.

Looking ahead, as the Eurozone’s economic outlook is closely tied to energy price dynamics, the euro may face headwinds in May if prices remain elevated.

Pound

GBP/EUR: Up from €1.14 to €1.15

GBP/USD: Up from $1.32 to $1.35

Trade in the pound was choppy at the start of April, with the currency suffering as investors trimmed their bets for upcoming Bank of England (BoE) interest rate hikes.

Further volatility then followed amid spikes in UK bond yields and some uneven UK economic releases, including a cautious interest rate decision by the BoE.

The coming weeks could see the pound subjected to fresh political risk as an expected collapse in support for Labour at the UK local elections may revive calls for Prime Minister Keir Starmer to resign.

US Dollar

USD/GBP: Down from £0.75 to £0.74

USD/EUR: Down from €0.86 to €0.85

The US dollar remained volatile through April, as its performance remained tied to developments in the Middle East.

This led the US dollar to falter in the first half of the month as the announcement of a ceasefire between the US and Iran triggered a notable relief rally.

However, hopes for a swift negotiated end to the conflict proved fleeting, with safe-haven demand firming again toward the end of April as the Strait of Hormuz remained closed.

Looking ahead to May, it’s likely that the situation in the Middle East will continue to act as the primary catalyst for the US dollar, with the ‘greenback’ likely to outperform its peers so long as progress in peace negotiations remains limited.

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