In reviewing the FX market trend for the week in mid-April, I found quite a few interesting changes. The erratic back-and-forth over the US-Iran situation has had a significant impact on the currency market, and in particular, the performance of the EUR/USD pair is especially worth watching.

That week, the US Dollar Index fell by 0.48%, while non-USD currencies generally strengthened. The euro rose by 0.34%, the Japanese yen gained 0.42%, and even the Australian dollar jumped 1.50%. At first glance, it looks like the US dollar weakened, but the logic behind it is actually quite complex.

Let’s start with EUR/USD. At the time, Trump said the US was very likely to reach an agreement with Iran in late April. The market briefly turned optimistic, and EUR/USD rose as well. Iran also announced on the 17th that it would open the Strait of Hormuz. But then there was an abrupt reversal: over the weekend, the situation deteriorated sharply, the strait was closed again, the US seized Iranian ships, and Trump once again began threatening to destroy Iran’s infrastructure. As a result, Iran refused to confirm participation in a new round of talks. The impact of this kind of whipsaw on the FX market is a surge followed by a pullback; EUR/USD ran into resistance around 1.185.

I noticed that market views on the dollar’s outlook are highly split. Mitsubishi UFJ believes that under the prevailing optimistic sentiment, the dollar will remain biased toward weakness in the short term, unless crude oil prices jump non-linearly or the stock market undergoes a major correction—otherwise, there is still room for the dollar to depreciate. But Crédit Agricole takes a different view. Based on fundamentals such as the premium, interest-rate differentials, and structural demand, they believe the logic supporting the dollar’s strength in the medium to long term remains solid. Fundamentally, this divergence reflects the tug-of-war between short-term sentiment and long-term fundamentals.

The yen story is also interesting. USD/JPY fell by 0.42%. On the one hand, it was due to easing US-Iran tensions; on the other hand, expectations for the Bank of Japan’s rate hikes were cut significantly. The speeches by Ueda Kazuo that week did not release signals for an April rate hike—instead, they emphasized the impact of the Middle East situation on Japan’s economy. Overnight index swap data say a lot on this point: the market expects the probability of the BOJ raising rates in April to drop from 50% last week to below 20%. A Reuters survey shows economists are split 50/50 on whether rates will be raised in April or June, but most still believe there will be a hike before the end of June.

What’s interesting is that if the central bank truly delays its rate hike, carry trades could become active again, which would push the yen exchange rate toward 162 or even higher. After meeting with US Treasury Secretary Bessent, Japanese Finance Minister Sayori Katayama warned that she is ready to take bold action to support the yen. This shows that the Japanese government’s concerns about exchange-rate fluctuations are very real.

On the technical side, after EUR/USD surged and then pulled back, it found support around 1.170 and 1.163. Moving averages and the RSI indicators suggest that bullish strength is still fairly strong, so another attempt toward 1.185 is not out of the question. As for USD/JPY, it has been oscillating in the 157.5 to 160.5 range; in the short term, it still depends on how the US-Iran situation develops.

Overall, this week’s market action is essentially a repeated contest between geopolitical developments and central bank policy expectations. Going forward, the performance of EUR/USD and the yen will both need close attention to how the relevant events unfold.