The U.S. dollar softened slightly on Monday, pulling back from recent highs as market participants reassessed geopolitical risks following reports of potential diplomatic breakthroughs between Iran, the U.S., and Israel. Despite easing modestly, the dollar index remained within its recent range, reflecting cautious positioning ahead of critical central bank meetings scheduled for this week.

Investor sentiment improved cautiously after the Wall Street Journal reported that Iranian officials had approached Arab intermediaries—specifically Qatar, Saudi Arabia, and Oman—to help initiate renewed nuclear negotiations with the United States. U.S. President Donald Trump further encouraged optimism by publicly calling on Tehran to seize this diplomatic opportunity “before it's too late.” The diplomatic overtures significantly reduced market concerns over the possibility of a broad regional conflict, especially as Israel’s military actions remained targeted primarily toward limiting Iran’s nuclear capabilities, as emphasized by Israeli Prime Minister Benjamin Netanyahu in his address to military forces.

Equity markets benefit from improving risk appetite

Reflecting this moderate easing of geopolitical tensions, risk sentiment broadly improved across global markets. The U.S. equity market responded positively, with the S&P 500 rising 0.81%, led predominantly by gains in consumer discretionary and technology sectors. Market sentiment was further buoyed by the notable pullback in energy prices, as WTI crude fell 2.08%, signaling increased confidence among traders that Middle East oil supplies would remain largely unaffected by recent hostilities.

In commodity markets, gold prices retreated by approximately 1.3% as investors booked profits after the precious metal reached an eight-week high during last week's geopolitical uncertainty. Copper prices edged modestly higher, up by 0.24%, supported by encouraging signs of improved consumer demand in China, raising expectations for stronger global industrial activity in the coming months.

Euro strengthens cautiously ahead of Fed announcement

In currency markets, EUR/USD advanced modestly, benefiting from a weaker dollar and technical factors supportive of potential bullish momentum. However, investors remained cautious, refraining from placing significant directional bets ahead of the pivotal U.S. Federal Reserve policy decision on Wednesday. Market participants are eager for clarity regarding future U.S. interest-rate policy, particularly whether Fed officials will reinforce expectations for rate cuts or adopt a more neutral, data-dependent stance amid recent signs of cooling U.S. inflationary pressures.

Yen remains range-bound before key Bank of Japan meeting

USD/JPY saw modest gains, yet remained tightly constrained within recent narrow ranges. The pair's Bollinger Band width narrowed sharply, marking its tightest range since January, reflecting investor hesitation ahead of Tuesday’s crucial Bank of Japan meeting. Governor Kazuo Ueda and his policy team face a complex task, balancing rising domestic inflationary pressures with lingering economic uncertainties, leaving investors uncertain whether the BoJ will signal adjustments in policy or maintain its cautious status quo.

Sterling resilient ahead of Bank of England decision

GBP/USD displayed resilience and edged slightly higher but remained capped beneath key technical resistance levels. Investors maintained cautious optimism toward sterling ahead of Thursday’s highly anticipated Bank of England policy meeting. Persistent inflation pressures coupled with slowing U.K. growth have created uncertainty over the BoE’s next policy move, prompting market participants to closely scrutinize the central bank’s forward guidance for clearer insights into its future rate path.

Treasury yields rise moderately, risk-sensitive currencies outperform

U.S. Treasury yields edged modestly higher across the curve, rising by 1 to 3 basis points, with the yield curve steepening slightly amid improved global risk sentiment. Meanwhile, risk-sensitive currencies showed notable strength. The Australian dollar significantly outperformed, with AUD/USD rising 0.72% and AUD/JPY climbing sharply by 1.11%, reflecting investors’ cautious optimism on reduced geopolitical anxieties and renewed confidence in diplomatic developments.

As global markets move toward critical central bank announcements later in the week, traders will closely watch developments in Middle East diplomacy, U.S. monetary policy signals from the Fed, BoJ’s stance on yen appreciation pressures, and the Bank of England’s economic outlook—all key factors likely to shape market sentiment and currency trajectories through the near term.