The global currency landscape remains shaped by geopolitical tension, central bank policy, and economic data. While the conflict in the Middle East significantly influenced FX markets in March, some of the initial moves have recently reversed as investors refocus on fundamentals and monetary policy developments.
The US dollar (USD) initially benefited from safe-haven flows and its status as an energy exporter, but has recently lost momentum. This is due to more mixed US economic data, declining Republican polling ahead of the November midterms, and global rate expectations weighing on the greenback. Political uncertainty in the US is also adding to volatility.
The euro (EUR) came under pressure at the start of the conflict but has since recovered, as markets now expect the European Central Bank (ECB) to consider further rate hikes in response to persistent inflation. We continue to see EURUSD at 1.20 in the second half of 2026, supported by European fiscal measures that should bolster both the economy and the currency.
The Swiss franc (CHF) was sought-after as a perceived safe-haven asset at the onset of the conflict but is now under pressure as risk appetite returns. Rising global rate expectations have widened the interest rate differential against the franc, weighing on the currency. We expect the CHF to underperform once the war subsides, with EURCHF trending higher over the medium term.
Sterling (GBP) has remained resilient despite geopolitical uncertainty and upcoming local elections in May, and we expect further gains after the vote. The Norwegian krone (NOK) remains attractive for yield-seeking investors, supported by low government debt and solid fundamentals. After a period of consolidation, we also expect a recovery in the Swedish krona (SEK).
We rate the Chinese yuan (CNY) and the Australian dollar (AUD) as Attractive. Strong FX conversions and a lofty trade surplus should allow the CNY to gain against the USD. Recent state media commentary also signals China’s ambition for a “strong currency” in global trade and reserves. The AUD has outperformed within G10 currencies since the Iran war started, thanks to its net-energy exporter status and relatively strong fiscal position to cushion against growth headwinds. We reiterate that the longer-term upward AUDUSD trajectory remains intact amid higher commodity prices.
Emerging market currencies recovered some of their earlier losses in April as sentiment regarding the Middle East conflict improved. Asian currencies lagged, while the Brazilian real benefited from its high carry and portfolio inflows and the Hungarian forint from the change in government. The war in the Middle East continues to present downside risks to growth, and put renewed upward pressure on inflation. Many emerging market central banks will likely be hesitant to continue cutting interest rates or may even consider hikes. This should benefit carry currencies over the medium term, where we still retain our preference for diversified exposure, including high yielders like the BRL, MXN, ZAR, and TRY. Pairing these with lower-yielding cyclical currencies can help manage bouts of volatility. Ongoing demand from USD diversification efforts, and, in some cases, appealing exposure to rising commodity prices are supportive as well. Speculative positioning in these currencies appears to have reduced materially after the recent sell-off, but likely also increased again with the rebound.
Overall, economic fundamentals and central bank policy are returning to the forefront, even as geopolitical risks remain relevant. Investors should stay flexible, as the interplay between politics, growth, and monetary policy will continue to create both opportunities and risks in the FX market. The coming months will show whether markets continue to move beyond geopolitical influences and refocus on macroeconomic trends.
Key risks
Our foreign exchange outlook is influenced by a broader range of potential outcomes than usual, which may result in currencies moving in either direction. Heightened geopolitical uncertainty and the possibility of a more pronounced global economic slowdown pose challenges to our strategy favoring carry trades and cyclical currencies.
Similarly, a stronger US economic recovery could postpone anticipated interest rate reductions, bolster the US dollar, and create additional obstacles to our current positions. Although foreign exchange volatility has increased compared to last year's lows, it remains below the levels observed in 2022. Volatility may rise further, particularly if crude oil shipments through the Strait do not resume soon. Conversely, any de-escalation of tensions could lead to a rapid appreciation of pro-growth currencies, as investors look to swiftly adjust portfolio risk exposures.