Financial markets turned defensive again as optimism around a possible U.S.-Iran peace agreement faded. Iran reportedly presented tough conditions that were rejected by U.S. President Donald Trump, reviving fears of a prolonged conflict. At the same time, the UK and France moved ahead with plans for a 40-country security initiative aimed at protecting shipping routes around the Strait of Hormuz after Iran warned foreign naval forces against entering the area. The renewed geopolitical tensions supported crude oil prices and strengthened the U.S. Dollar, while investors stayed cautious ahead of upcoming U.S. Inflation and Retail Sales data, along with the scheduled meeting between Donald Trump and Chinese President Xi Jinping.
Iran’s proposal reportedly ruled out any immediate dismantling of its nuclear facilities. Instead, Tehran demanded that the U.S. first remove naval restrictions, ease sanctions, unfreeze Iranian assets, allow unrestricted oil exports, recognize Iran’s control over the Strait of Hormuz, and accept a Lebanon ceasefire condition before broader negotiations could begin. Iran also pushed for compensation linked to war damages and suggested that nuclear discussions should only happen after the conflict ends. In contrast, Washington continues to prioritize nuclear concessions before any broader agreement, leaving little room for a near-term breakthrough.
Military tensions also intensified after Israeli Prime Minister Benjamin Netanyahu reiterated that removing Iran’s nuclear capability remains a central objective. Additional reports suggested Donald Trump discussed possible strikes on Iranian nuclear sites with Netanyahu, although those reports remain unconfirmed. Even so, markets interpreted the developments as signs of rising escalation risks.
Saudi Aramco warned that even if shipping activity through the Strait of Hormuz resumes quickly, restoring normal oil market conditions could still take several months. Meanwhile, Qatar completed its first Liquefied Natural Gas (LNG) shipment through the Strait since the conflict began, while Pakistan is reportedly in discussions with Iran regarding additional Qatari LNG transit arrangements.
On a trade-positive front, Beijing confirmed that Donald Trump will visit China from May 13 to 15 at the invitation of President Xi Jinping, placing additional focus on U.S.-China discussions amid elevated geopolitical and energy-related uncertainty.
In the U.S., labor market conditions remained relatively firm, per the data released on Friday. April Nonfarm Payrolls (NFP) increased by 115K, well above expectations of 55K. February payrolls were revised lower to -156K, while March figures were adjusted slightly higher to 185K, leaving overall revisions modestly negative. The three-month average now stands at 48K.
The stronger-than-expected jobs report reduced expectations for near-term Federal Reserve (Fed) rate cuts. However, softer wage growth and a continued decline in labor force participation offered some signs of cooling beneath the surface.
Chicago Fed President Austan Goolsbee said inflation remains a concern even though labor market conditions are broadly stable, emphasizing that the Fed must continue monitoring price pressures carefully.
Meanwhile, the University of Michigan Consumer Sentiment Index for May fell to 48.2 from the expected 49.5, reflecting persistent concerns tied to the Iran-U.S. conflict and broader economic uncertainty.
In currency and commodity markets, the U.S. Dollar Index (DXY) opened the week stronger after two weeks of losses, while West Texas Intermediate (WTI) crude oil rebounded from its recent pullback. EURUSD and GBPUSD eased slightly, USDJPY recovered, and Antipodean currencies weakened. USDCAD extended gains despite stronger oil prices as traders focused on weak Canadian employment data. Gold also slipped after posting its first weekly gain in three weeks, while Bitcoin (BTC) and Ethereum (ETH) traded lower after ending last week positively. Asia-Pacific equity markets weakened despite the positive finish on Wall Street.
The U.S. Dollar’s recovery overshadowed hawkish comments from European Central Bank (ECB) officials and, combined with rising geopolitical tensions surrounding the UK-France push to unite multiple nations against Iran’s Strait of Hormuz blockade threats, pressured both EURUSD and GBPUSD lower. Meanwhile, USDJPY rebounded after falling for two straight weeks as traders worried that Japan’s government policies could complicate future Bank of Japan (BoJ) rate hikes.
ECB President Christine Lagarde warned that higher energy prices could eventually lift consumer inflation through rising business costs, while ECB policymaker Joachim Nagel signaled that the central bank stands ready to act if energy-driven inflation strengthens further.
At the same time, concerns over Japan’s economic outlook also increased. Reuters Breakingviews columnist Hudson Lockett noted that Prime Minister Sanae Takaichi’s energy subsidy measures, aimed at protecting households from rising fuel costs, are adding fiscal pressure and weakening the Japanese Yen, ultimately making imported energy more expensive.
AUDUSD and NZDUSD retreat from the multi-week highs marked last week despite stronger-than-expected Chinese inflation data. Meanwhile, USDCAD extends its rally for a fourth straight day even as crude oil, Canada’s key export commodity, rebounds. Weak Canadian employment figures appear to be supporting USDCAD buyers.
China’s latest inflation data highlighted growing pressure from rising energy costs. Producer Price Index (PPI) inflation jumped 2.8% YoY, the highest level in 45 months and above market forecasts, while Consumer Price Index (CPI) inflation rose 1.2%, also beating expectations. However, the inflation surge was mainly driven by higher costs, limiting the People’s Bank of China’s (PBoC) room for aggressive monetary easing to support the economy.
In Canada, labor market conditions weakened notably. Employment unexpectedly declined by 17.7K versus forecasts for a 15.0K increase, while the unemployment rate climbed to 6.9% against the expected 6.7%. Most of the job losses came from the full-time sector, signaling softer labor market momentum.
WTI crude oil often starts the week stronger as weekend headlines continue to signal little chance of ending the Iran war, though prices tend to ease afterward. Most recently, crude oil futures jumped after U.S.-Iran tensions intensified. U.S. President Donald Trump rejected Iran’s latest peace proposal as “totally unacceptable,” while Tehran’s response exposed deep differences between both sides, keeping geopolitical risks elevated.
Gold and cryptocurrencies start the week under pressure as the U.S. Dollar rebounds, while Asia-Pacific equities trade lower despite a positive close on Wall Street. However, lingering uncertainty surrounding Iran continues to support gold’s safe-haven appeal. At the same time, equities remain backed by upbeat U.S. economic data and strong corporate earnings, whereas cryptocurrencies draw support from favorable technical signals, even as Bitcoin (BTC) and Ethereum (ETH) post intraday losses on Monday after ending last week higher.
U.S. equity markets stayed resilient despite geopolitical tensions, with the S&P 500 and Nasdaq Composite touching fresh record highs as strong U.S. employment data reinforced confidence in the Artificial Intelligence (AI)-led technology rally.
Among major stock movers, Cloudflare declined sharply following weak Q2 revenue guidance and planned job cuts, while Fluence Energy rallied after reporting strong earnings driven by rising demand for energy storage solutions. Intel advanced on stronger Q1 results and optimism around its AI and foundry businesses, whereas Akamai Technologies jumped after securing a major long-term cloud infrastructure agreement reportedly linked to Anthropic.
Overall, optimism surrounding technology and AI continued to overshadow concerns tied to higher oil prices and interest rates.
U.S. Existing Home Sales remains the only key release on Monday’s economic calendar, but markets will mainly focus on fresh developments surrounding the Iran war and U.S.-China relations ahead of the Donald Trump-Xi Jinping meeting.
The U.S. Dollar’s rebound still lacks strong support from the Federal Reserve’s (Fed) hawkish stance, which may keep broader market moves limited. However, rising geopolitical tensions and cautious sentiment could continue supporting the Greenback even without strong upside momentum. Traders are also likely to stay defensive ahead of upcoming U.S. inflation, retail sales, and Eurozone ZEW Sentiment data, adding to subdued market conditions.
Against this backdrop, EURUSD and GBPUSD may remain under pressure, while AUDUSD and NZDUSD could extend their pullback from recent highs. USDJPY, meanwhile, may continue recovering after recent losses as traders reassess the outlook for Bank of Japan (BoJ) rate hikes.
In commodities, WTI crude oil could build on its latest rebound if tensions between Iran and the U.S. intensify further. Gold and cryptocurrencies may trim part of their previous weekly gains, while equities could stay mildly supported by upbeat global data, improving earnings sentiment, and lingering hopes for a quicker end to the Iran war.
May the trading luck be with you!
