Oil Surges, Dollar Strengthens as US-Iran Tensions Rise and Central Banks Turn Hawkish

Key Highlight

• Geopolitics remains the primary market driver, with escalating US–Iran tensions lifting oil prices and fuelling demand for the US dollar as a safe haven.
• Central banks are leaning more hawkish overall, with both the BoE and ECB signalling further tightening despite holding rates.
• Key event risks this week include UK local elections and US labour market data, both likely to drive GBP and USD direction.
• Japan’s currency intervention and volatility in oil markets highlight how quickly sentiment can shift in the current environment.

Market Recap

Last week delivered significant volatility across FX markets, shaped by a mix of geopolitical developments, central bank decisions and macroeconomic data surprises.

The US dollar weakened through most of the week, recording losses in four out of five sessions. Early optimism around Iran’s proposal to reopen the Strait of Hormuz supported risk appetite, but underlying US data told a more concerning story. A combination of weaker Q1 growth, softer manufacturing activity and persistently elevated inflation reinforced stagflation concerns, reflected in a notably split Federal Reserve decision to keep rates unchanged at 3.75%.

In Japan, authorities stepped in to support the yen for the first time since mid-2024, reportedly spending over $30bn. This triggered a sharp appreciation in JPY, marking its strongest daily move in nearly two years and underlining growing discomfort with currency weakness.

In Europe and the UK, expectations for further rate hikes intensified. The Bank of England maintained its policy rate but shifted its communication, outlining multiple inflation scenarios that all imply additional tightening. Similarly, the European Central Bank kept rates steady, while signalling that a June hike remains firmly on the table.

Oil markets were highly reactive throughout the week. Prices initially surged on supply disruption fears before reversing sharply after signs of diplomatic progress. However, with shipping through the Strait of Hormuz still heavily constrained, the broader energy risk remains unresolved.

Market Update

The new week begins with geopolitical tensions back in focus. Renewed military exchanges between the US and Iran over the weekend have pushed oil prices higher again and supported the US dollar, as markets revert to a more defensive stance. With the Strait of Hormuz still effectively restricted, energy markets remain a key risk factor.

In Asia-Pacific, the Reserve Bank of Australia has taken a more aggressive policy stance, delivering another rate hike to 4.35%. This reinforces its commitment to tackling inflation and sets it apart from other central banks that are moving more cautiously.

For sterling, attention turns to Thursday’s UK local elections. A weaker-than-expected outcome could introduce additional political uncertainty, which may weigh on GBP sentiment in the near term.

In the US, Friday’s non-farm payrolls report will be the focal point. Expectations point to a softening labour market, with rising unemployment and weaker job creation. If confirmed, this would further complicate the Federal Reserve’s position as it balances slowing growth against persistent inflation pressures. Ahead of that, ISM services data and job openings figures will provide early signals on labour demand and price pressures.

Across the eurozone, commentary from ECB officials will be closely monitored alongside wage data midweek. Any indication that wage growth is easing could challenge current market expectations for continued aggressive rate hikes.

05th May 2026

How We Can Help...

Our team are here to help you get more from your money when making international payments. We will work with you to understand your payment needs and offer guidance on the best options available to you.

Get in Touch!

P: 07441 910 897

E: FX-Admin@frank-exchange.com

This document has been prepared solely for information and is not intended as an Inducement concerning the purchase or sale of any financial instrument. By its nature market analysis represents the personal view of the author and no warranty can be, or is, offered as to the accuracy of any such analysis, or that predictions provided in any such analysis will prove to be correct. Should you rely on any analysis, information, or report provided as part of the Service it does so entirely at its own risk, and Frank eXchange Limited accepts no responsibility or liability for any loss or damage you may suffer as a result.  Information and opinions have been obtained from sources believed to be reliable, but no representation is made as to their accuracy. No copy of this document can be taken without prior written permission.