After unusual volatility in the foreign exchange market on Friday, particularly for GBP/USD and USD against EUR, we are hearing a lot of chatter about currency manipulation. When geopolitical tensions in the Middle East escalated, the British Pound dropped against the United States Dollar. The initial European session saw GBP/USD push under 1.3550 and test 1.3530. This drastic drop speaks to a clear flight to quality, as investors are exhibiting a greater aversion to risk and a clearer focus on global stability.
Deepening conflict within the region is driving a pronounced risk-off sentiment. This follows through on Iran’s promise to retaliate for the latest attacks suspected to have been carried out by Israel. Next moves in IRA, investors are in wait-and-see mode, as a geopolitical wild card of uncertainty rattles currency markets. As a consequence, the Pound Sterling has dropped precipitously. Traders are nervous and on the hunt for safe-haven assets such as the US Dollar.
At the same time, the EUR/USD currency pair displayed this weakness, keeping EUR/USD’s Friday declines close to 1.1550 throughout Friday’s trading day. This pair is retrenching for now after setting new multi-year highs as of Monday this week. Fears of geopolitical tension, especially the impact of the war in Ukraine on the global economic order continue to stoke fears. The aversion to risk is growing, and it will continue to test the resilience of the US Dollar. Consequently, the GBP and EUR are undercutting tendency.
In addition to geopolitical concerns, market participants are aware that effective tariff rates imposed by the United States will remain high throughout 2025. This understanding has changed the market dynamics for everyone and made the picture more complicated. Now, traders are trying to reckon with the reality of a new, long-term trade war. The lost future is torn US trade policy remains. This resilience remains steadfast despite the deepening legal challenges still unfolding against tariffs illegally imposed under the International Emergency Economic Powers Act (IEEPA). Yet despite the weight of these challenges, it doesn’t seem likely that they will dramatically change the status quo in the near term.
Along with grappling these choppy waters, traders are looking ahead to more important sentiment data out of the United States. This forthcoming data is expected to sway market sentiment and may depending on forthcoming jobs data trigger further updates to currency valuations. Geopolitical developments and macroeconomic data are still highly fluid. As they enter into a new trading environment, traders will be on the lookout as they calculate new risks and pursue new opportunities.