Currency markets stay cautious as geopolitical risks dominate sentiment

The foreign exchange market opened the week on a cautious note as the US dollar held firm against major currencies, supported by safe-haven demand amid renewed geopolitical tensions in the Middle East.

Investors closely monitored developments between the United States and Iran while awaiting key macroeconomic events, including the European Central Bank's annual forum and the upcoming US labour market data, for fresh clues on the global interest rate outlook

Geopolitical developments remain in focus

The United States and Iran exchanged fire near the Strait of Hormuz over the weekend, raising concerns over regional stability and global markets.

Iran's Islamic Revolutionary Guard Corps (IRGC) said it targeted US military sites in neighbouring countries, including Kuwait and Bahrain, after the United States struck Iranian sites.

Iran also demanded a full withdrawal of Israeli forces from Lebanon as part of a final agreement with the US.

However, tensions appeared to ease later.

Dollar stays resilient

The US Dollar Index held steady above the 101.00 mark during Monday's European session after ending the previous week in positive territory.

US stock index futures also traded with modest gains.

The index traded near 101.36 and remained on track for a monthly gain of about 2.5%, marking its strongest monthly advance since July last year.

The dollar's strength has been supported by a combination of safe-haven demand and shifting interest rate expectations.

Higher oil prices following disruptions to shipping through the Strait of Hormuz added to inflation concerns.

That reduced expectations of easier monetary policy and strengthened the view that the US Federal Reserve could keep interest rates higher for longer.

Market participants are now focused on this week's US employment report.

Payroll and unemployment figures are expected to provide further insight into the strength of the labour market and the outlook for monetary policy.

Major currencies trade in narrow ranges

The euro traded marginally higher near 1.1400 during the European morning, while remaining close to levels seen after touching a 13-month low last week.

The common currency is on track for a monthly decline of about 2.3%.

The British pound recovered modestly and held above 1.3200 ahead of the Bank of England's May Consumer Credit data.

Sterling remains down by roughly 2% for the month.

The Japanese yen traded near 161.80 against the dollar despite stronger-than-expected domestic retail trade data.

The yen remained close to its weakest level in four decades and continued to trade above the 160 level that many market participants consider a possible trigger for official intervention.

Risk-sensitive currencies also remained under pressure.

The Australian dollar traded around 0.6900 after Reserve Bank of Australia Assistant Governor Chris Kent said the central bank would be better prepared to respond to future crises while maintaining that "the cash rate target remains our primary and preferred instrument."

His remarks had little immediate impact on markets.

The New Zealand dollar also remained weak, leaving both currencies on track for notable monthly declines.

ECB forum and jobs data in focus

Attention now shifts to the ECB's annual forum, where President Christine Lagarde will open proceedings on Monday.

Investors will also watch a policy panel later in the week featuring Warsh for further signals on inflation, oil prices, and financial market volatility.

For now, the dollar continues to retain its advantage.

While day-to-day price movements may remain volatile, geopolitical uncertainty in the Gulf and ongoing questions surrounding US monetary policy are keeping demand for the greenback well supported.