Forex markets cautious as Strait of Hormuz tensions escalate

The US dollar remained resilient against major currencies during the European session on Tuesday after weakening in the previous session, as geopolitical tensions in the Middle East continued to keep investors cautious.

Although markets initially welcomed reports suggesting progress in negotiations between the United States and Iran, escalating tensions in the Strait of Hormuz limited the improvement in global risk sentiment.

Investors are also awaiting fresh US economic data later in the day, including the Conference Board’s Consumer Confidence Index for May and the Federal Reserve Bank of Dallas Manufacturing Business Index.

Middle East tensions keep markets cautious

Market sentiment improved on Monday after reports suggested that the US and Iran were moving closer to an agreement that could extend the ceasefire for another 60 days.

According to the reports, both sides were also discussing reopening the Strait of Hormuz fully and continuing negotiations over unresolved issues, including Iran’s nuclear program, during the truce period.

However, investor confidence weakened later in the day after reports emerged that the US military had targeted Iranian missile launch sites and mine-laying vessels in southern Iran.

The US reportedly described the operation as self-defense strikes.

Iran responded strongly to the developments.

Iran’s Fars news agency reported that a senior spokesperson for Iran’s Armed Forces warned that any new aggression against Iran would be met with a far more severe response that extends beyond the region.

Meanwhile, Iranian negotiators are reportedly meeting Qatari mediators in Doha to finalize a memorandum of understanding with the US.

Reports indicated that disagreements over Iran’s nuclear program and sanctions remain major sticking points in the negotiations.

US dollar index recovers modestly

The US Dollar Index managed to hold modest gains above the 99.00 level after declining 0.3% on Monday.

At the same time, benchmark US Treasury yields moved lower.

The yield on the 10-year Treasury note fell about 1% on the day and traded near 4.5%.

US equity index futures pointed higher despite geopolitical uncertainty, with futures rising between 0.7% and 0.9%.

The mixed market reaction highlighted ongoing investor caution, with traders balancing optimism over diplomatic progress against fears of further escalation in the Middle East.

Major currency pairs trade cautiously

In the currency market, the euro struggled to extend gains against the dollar.

EUR/USD traded sideways below the 1.1650 level during the European session after posting gains on Monday.

The British pound also lost momentum after rallying earlier in the week.

GBP/USD climbed above 1.3500 on Monday to reach its highest level in 10 days.

However, the pair turned lower on Tuesday and traded near 1.3480, down 0.2% on the day at the time of writing.

The Japanese yen remained relatively stable against the dollar.

USD/JPY traded near the 159.00 level after ending Monday slightly lower.

Gold retreats after sharp gains

Gold prices reversed direction after recording gains of more than 1% on Monday.

XAU/USD declined toward the $4,500 level early Tuesday as investors reassessed geopolitical developments and broader market sentiment.

Meanwhile, the New Zealand dollar remained under pressure ahead of the Reserve Bank of New Zealand’s monetary policy decision.

NZD/USD lost more than 0.3% on the day and traded near 0.5850.

Markets widely expect the Reserve Bank of New Zealand to leave interest rates unchanged at 2.25% when it announces its policy decision during the Asian session on Wednesday.