Geopolitical tensions in the Middle East, particularly between the US and Iran, have dominated market sentiment, with several sources reporting exchanges of attacks near the Strait of Hormuz. The US military's Central Command (CENTCOM) confirmed intercepting Iranian attacks and conducting self-defense strikes, while President Trump stated that the ceasefire remains in effect and recent hostilities should not be seen as a restart of war or a collapse of the ceasefire arrangement [5][8]. However, Trump also warned that the US would respond more forcefully if a deal is not reached soon, and Iran has yet to finalize its response to the latest US proposal [8].
The ongoing conflict has had a pronounced effect on currency markets. The US Dollar Index (DXY) has been supported by stronger-than-expected US labor market and inflation data, with the NY Fed's 1-year inflation expectations rising to 3.64% in April (vs. 3.5% expected), the highest since September 2023, and weekly initial jobless claims at 200k (vs. 205k expected), pushing the 4-week average to a two-year low of 203.25k [3]. Hawkish commentary from Federal Reserve officials, including Boston Fed President Collins and Minneapolis Fed President Kashkari, signaled that rates could remain on hold or even rise if the Strait of Hormuz remains closed, leading to a repricing of rate hike probabilities and higher Treasury yields (2yr at 3.91%, 10yr at 4.39%) [3].
In the FX space, the Euro has shown resilience on crosses but slipped against the Dollar, with analysts highlighting a binary path for EUR/USD depending on Gulf developments. ING suggests a peace deal could lift EUR/USD above 1.1800, while failed negotiations or renewed tensions could push it below 1.1700 [2]. Commerzbank notes that an end to the Iran conflict and a reopening of the Strait of Hormuz would likely support the Euro via real-rate dynamics, as Eurozone inflation expectations and ECB pricing are more sensitive to oil than in the US [9]. Political developments, such as Viktor Orban's defeat in Hungary, are also seen as structurally supporting the Euro [9].
The Japanese Yen remains vulnerable despite recent interventions by Japanese authorities, including a suspected 5 trillion Yen (USD 32 billion) intervention after USD/JPY crossed 160.00, with further smaller interventions reported during the holiday period [4][7]. Japanese officials have stated there are no constraints on intervention frequency and remain in close contact with US authorities [4]. However, the Yen faces headwinds from low BoJ rates and higher oil prices, while the Dollar draws safe-haven support amid Middle East tensions [4][7].
US equity markets have shown mixed reactions. Dow Jones futures rose 0.18% to near 49,790, S&P 500 futures gained 0.30% to near 7,390, and Nasdaq 100 futures advanced 0.48% above 28,820 in early European trading, reflecting improved sentiment as tensions appeared to de-escalate [5]. However, Wall Street closed lower on Thursday (Dow -0.63%, S&P 500 -0.38%, Nasdaq 100 -0.13%) [5]. Notable earnings included McDonald's (revenue $6.52B, EPS $2.83, beat), Datadog (shares +30.61% on strong results and raised outlook), and MercadoLibre (revenue $8.85B, +49% YoY, but EPS miss sent shares -7%) [5].
Looking ahead, markets are focused on the US April Nonfarm Payrolls report, expected to show a gain of 62K jobs (vs. 178K in March) and an unchanged unemployment rate at 4.3% [1][4][5][6][8]. Analysts note that the employment data is unlikely to reflect war effects yet, and the outcome could influence the Fed's policy outlook [1][6][8]. The University of Michigan's consumer sentiment and inflation expectations are also in focus, with political implications for the US administration [1][8].
Across other major pairs, GBP/USD trades higher near 1.3590, supported by risk-on sentiment and outperforming most peers except antipodeans [6][8]. EUR/JPY holds above 184.00, buoyed by risk-on flows and expectations of ECB rate hikes, with markets pricing a 92% chance of a 25bps hike in June and three hikes by end-2026 [7].
CONCLUSION
Markets remain highly sensitive to developments in the US-Iran conflict and the status of the Strait of Hormuz, with the US Dollar supported by strong domestic data and hawkish Fed signals. The Euro and Yen are reacting to both geopolitical and domestic policy factors, while equities show tentative optimism amid hopes of de-escalation. The upcoming US employment report is seen as a key catalyst for the next market move.