The forex market is poised for a week of increased volatility and notable movements as a potential breakthrough in US-Iran relations emerges, alongside important economic data releases. Last week saw subdued activity in forex markets with limited directional trends, but the upcoming week promises greater action driven by geopolitical and economic developments.
Market sentiment gained a slight boost from the US Federal Open Market Committee meeting minutes, which showed a marginally hawkish stance supporting the US dollar. Meanwhile, inflation reports from the UK and Canada came in lower than expected at 2.8%, easing pressure on their central banks and weakening the British pound and Canadian dollar. Australia’s unemployment rate unexpectedly rose from 4.3% to 4.5%, while UK manufacturing and services PMIs exceeded expectations, providing some confidence in the British economy despite ongoing political uncertainties.
The biggest market driver this week is the anticipated signing of a memorandum of understanding between the US and Iran. President Trump has indicated that this agreement will likely lead to a 60-day period ending the US blockade of Iran and reopening the Strait of Hormuz. This development is expected to lift risk appetite significantly, pushing stock markets higher and causing yields and crude oil prices to fall. Forex pairs sensitive to risk sentiment, such as AUD/USD and AUD/JPY, are forecasted to rise sharply once markets open.
Technically, the US dollar index remains range-bound with no clear directional trend after a year of consolidation. The emerging peace deal may reduce inflation fears and bond yields, potentially weakening the dollar slightly. However, as inflationary pressures are global, the relative impact may be limited. Traders are advised to watch other factors beyond the US dollar when making trading decisions this week.
The Australian dollar showed resilience last week despite lingering uncertainties about US-Iran tensions. Should the deal progress as expected, AUD/USD could break above its recent 3.5-year high, entering “blue sky” territory with room for further gains. Similarly, the AUD/JPY cross is positioned for upward momentum.
US equity markets remain robust with both the S&P 500 and NASDAQ 100 near record highs. Strong earnings reports, particularly from AI-focused companies like NVIDIA, combined with optimism over the US-Iran agreement, have fueled bullish momentum. The S&P 500 is approaching key resistance at 7,500 points, with potential to reach 8,000 if upward momentum continues.
Crude oil prices declined last week amid growing expectations of the US-Iran deal easing supply risks related to the Strait of Hormuz blockade. Brent crude futures may open significantly lower this week but could see price stabilization as details of the agreement unfold. Traders looking for short-term opportunities might consider short positions on bearish momentum early in the week.
For GBP/USD traders, this week will be marked by light trading on Monday due to public holidays in several major markets but expected heightened volatility afterward. The pair remains within its mid-term range but has shown improvement from recent lows amid uncertainty around UK politics and US Federal Reserve policy outlooks influenced by geopolitical shifts. A sustained move above 1.3500 could signal renewed confidence and buying interest.
Key economic data to watch include the US Core PCE Price Index, US Advance GDP figures, Australian CPI inflation data, Reserve Bank of New Zealand policy announcements (with no expected change), and Canadian GDP reports. These releases will help shape market direction alongside geopolitical developments.
Overall, traders should prepare for an active week with increased volatility in forex markets driven by fundamental news flow and technical setups linked to major currency pairs and global indices.
