Market Overview

Global markets opened the week under the influence of heightened geopolitical risk and shifting macroeconomic expectations. The US dollar index initially advanced to its strongest level since mid-December before reversing course during the US session, reflecting fragile confidence in safe-haven flows. Treasury yields declined across the curve, signalling growing caution around the US economic outlook and reinforcing volatility across FX and commodities.

Investor attention was sharply drawn to developments in Venezuela, where US military action triggered a reassessment of geopolitical risk premiums across precious metals and energy markets. While the initial shock boosted demand for defensive assets, the market response remained nuanced as traders balanced risk aversion against weakening US macro data.

Currency Markets: Dollar Momentum Falters

The US dollar struggled to sustain its early gains despite geopolitical support. After touching a fresh multi-week high, the dollar index retreated as softer US manufacturing data and falling Treasury yields capped upside momentum. The ISM Manufacturing PMI slipped deeper into contraction, reinforcing expectations that US growth is slowing and limiting the Federal Reserve’s room to maintain a restrictive stance for an extended period.

Major currency pairs reflected this indecision. The euro and sterling stabilised as dollar demand cooled, while the Japanese yen showed mixed performance, supported intermittently by safe-haven flows and hawkish signals from the Bank of Japan. Overall, dollar strength appeared increasingly data-dependent rather than driven purely by geopolitical developments.

Gold Surges on Safe-Haven Demand

Gold prices climbed to a one-week high as investors sought protection from rising geopolitical uncertainty. The move was driven by strong safe-haven inflows following US action in Venezuela, outweighing the impact of still-elevated global interest rates. The decline in US real yields provided additional support, improving the appeal of non-yielding assets.

Despite hawkish rhetoric from some central banks, including the Bank of Japan, near-term flows into gold remained dominant. Market participants continue to view precious metals as a hedge against geopolitical shocks and potential policy missteps, keeping gold well supported at elevated levels.

Oil Markets Reprice Geopolitical Risk

Crude oil prices rebounded after early weakness, with traders reassessing the implications of renewed US involvement in Venezuela. While speculation initially emerged around the potential for increased Venezuelan output, market consensus quickly shifted toward the view that any meaningful supply recovery would take considerable time due to infrastructure constraints and long-term underinvestment.

Support also came from OPEC+ reaffirming its commitment to keep output unchanged in the near term, limiting supply-side pressure despite a broadly well-supplied outlook for 2026. As a result, oil prices stabilised, with gains driven more by risk premiums than by immediate changes in physical supply and demand.

Central Banks and Policy Expectations

Central bank guidance remained a critical theme for markets. In Japan, Bank of Japan Governor Kazuo Ueda reiterated the possibility of further rate hikes if economic conditions evolve as expected, reinforcing the narrative of gradual policy normalisation. Markets are increasingly pricing additional tightening over the next year, adding a medium-term layer of support to the yen.

In contrast, expectations around the Federal Reserve remain cautious. With US manufacturing activity weakening and inflation showing signs of moderation, traders continue to price potential rate cuts later in 2026. This divergence in policy trajectories is likely to remain a key driver of FX volatility in the months ahead.

Market Outlook

Looking ahead, markets are expected to remain sensitive to both geopolitical headlines and incoming economic data. While the immediate shock from Venezuela has lifted safe-haven assets, its longer-term impact will depend on how the situation evolves and whether it materially disrupts global supply chains.

With US data softening and central banks navigating increasingly divergent paths, volatility across currencies and commodities is likely to persist. Investors remain focused on inflation readings, labour market data, and central bank communication as they reassess risk exposure in an environment shaped by both geopolitical uncertainty and shifting macro fundamentals.