USD: Markets price containment as carry quietly returns
Risk appetite has quietly come back to life, and FX is showing it. As volatility eases, investors typically stop paying up for pure safety and begin looking for yield again. That shift has helped the emerging market carry trade recover some lost ground, as the US Dollar no longer carries the same geopolitical premium it wore during the most anxious stretch of the conflict. However, this does not look like a blind rush into high beta. It feels more selective, with investors leaning back toward yield while keeping a close eye on what sits behind it, especially energy exposure.
Energy is doing more of the sorting this time. In Latin America, net commodity and energy exporters benefit more cleanly when global prices hold firm. Their yields are supported by improving external balances and healthier trade dynamics. By contrast, high yielding currencies tied to net energy importers struggle to keep pace, as higher energy prices act like a current account tax and complicate inflation expectations. Carry is back, but it is no longer one trade. That split is visible in the tape, with the Brazilian Real up roughly 9% year to date versus about 3% for the Mexican Peso.
This is also why the Strait of Hormuz still matters, even when markets feel calmer. Hormuz rarely trades like a simple on or off switch. The current episode is serious, but price action depends on whether disruptions prove persistent and large enough to force a lasting inflation shock. History is instructive here. During the Tanker War, attacks on shipping continued without a permanent closure, and markets ultimately focused on whether navigation risk could be stabilized and priced as a premium rather than treated as a systemic break.
That framework ties the Dollar, carry, and Hormuz together. The Dollar tends to peak when markets fear disorderly outcomes, as safety demand and liquidity preference rise together. When investors start to see disruption as containable or backstopped, that premium fades, and the Dollar reverts toward its funding role. Carry then becomes less about volatility alone and more about terms of trade, with energy exporters and importers diverging sharply. If confidence holds, carry can keep grinding back. If it wobbles, the Dollar will not need much of a push to regain its defensive bid.
EUR: Elevated energy, fragile euro sentiment
Weekend reports emerged that Iran has presented the US with a new proposal to reopen the Strait of Hormuz. The plan reportedly calls for extending the ceasefire so both sides can work toward a more durable peace framework, with nuclear talks to follow later once a US blockade has been lifted. The US has yet to signal any willingness to explore the proposal.
The euro has opened on a slightly cautious footing, waiting to react more decisively to any renewed acceleration in de‑escalation momentum until clearer signals emerge from Washington. Markets, in fact, start the week more accustomed to looking through the noise after weeks of conflicting geopolitical headlines. The latest example came on Friday, when reports suggested Iran’s foreign minister, Abbas Araghchi, was heading to Pakistan. It later emerged, however, that the Iranian official had left Pakistan well before the planned arrival of US envoys, a visit that was subsequently called off altogether by President Trump. Overall, while both sides have stated their intention to seek an end to the conflict, deep mutual distrust persists, continuing to complicate negotiations, and leaving markets short of the confidence needed to turn more convincingly optimistic.
With the Strait of Hormuz still effectively locked, upward pressure on oil prices remains elevated – a negative for the euro. That said, we are doubtful that the currency will re‑engage with March’s bearish posture just yet, as long as there remains a sense that both sides are still committed to resolving the conflict. This bearish “cap” is increasingly time‑sensitive, however: each day without clear progress while the Strait remains shut further dents sentiment – for which the common currency has increasingly become a proxy.
The euro’s bearish reaction – more pronounced than that of most G10 peers – has been particularly acute amid fears of conflict‑driven economic drag. With the eurozone heavily exposed to imported energy and the trauma of the 2022 energy crisis still fresh, investors remain especially wary of the bloc’s medium‑term outlook.
The main focus this week turns to a slate of central bank policy meetings, including the ECB, the Fed and the BoE. Expectations are for a broadly cautious tone, with policymakers likely to remain non‑committal as they seek additional data to assess how the conflict is impacting economic activity. As a result, we do not expect sharp FX moves, with guidance likely to remain directionless. That said, given the euro’s heightened sensitivity to conflict‑induced economic implications, any greater‑than‑expected emphasis on inflation guardrails from Powell relative to Lagarde could provide a more supportive impulse for the dollar – particularly within a broader safe‑haven environment should the US–Iran stalemate persist.
For the week, we see EUR/USD holding above the 200‑day moving average around 1.1680, with downside risks skewed by geopolitcs and the market’s reading of this week’s Fed versus ECB policy meetings, unless meaningful de‑escalation signals were to emerge.
GBP: Hawkish bias, real carry appeal
Sterling ended last week broadly higher against the G10 complex. A slate of stronger‑than‑expected macroeconomic releases – against a backdrop of fragile but still‑intact risk sentiment – brought the familiar hawkish stickiness of the Bank of England, and sterling’s associated carry appeal, into sharper focus ahead of this week’s policy meeting.
Markets currently price just over two rate hikes by year‑end, and with the policy rate already at 3.75% – among the highest in the G10 – sterling has attracted renewed demand from a carry‑trade perspective.
Importantly, this carry appeal remains intact:
We interpret this as investors continuing to discount geopolitical tail risks, with long‑term growth and inflation expectations still anchored: Long‑dated bonds have continued to sell off to geopolitical headlines, signalling that markets are reluctant to price in a structural low‑inflation, low‑growth regime, and are instead repricing uncertainty and fiscal‑related term premia. Stable 5y5y forward inflation swaps and real 10‑year yields reinforce this interpretation of the yield curve.
Against this backdrop, sterling appears better positioned to benefit from any hawkish signals from the BoE this week, particularly relative to the euro. In fact, the conflict narrative has also been less punitive for sterling than for the single currency, with investors viewing the UK shock primarily as a price issue rather than a growth one – reflecting the UK’s lower physical exposure to imported energy versus the euro area. This environment supports a cleaner FX transmission channel from policy expectations for the pound.
Barring significant developments on the domestic UK political front this week, we therefore maintain a mild upside bias for GBP/EUR, with a test of 1.1550 likely. For GBP/USD, we retain a more neutral stance amid still‑fragile but not materially deteriorating geopolitical conditions, and see 1.35 as a reasonable trading anchor for the week, absent meaningful geopolitical developments.
Market snapshot
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Calendar: April 27 – 1 May
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
