FX markets have been reshaped in early 2026 by a new geopolitical shock: the Iran conflict. The surge in energy prices and renewed supply risks have reintroduced stagflation concerns, driving a temporary return of USD safe-haven demand and disrupting earlier market positioning. While the recent ceasefire offers some relief, uncertainty remains high.
Looking ahead, the path for currencies will be defined by how geopolitical tensions evolve. Our baseline scenario points to a contained conflict, gradual normalization in risk sentiment, and a softer USD as inflation pressures ease and the Fed turns more cautious. However, alternative scenarios, from prolonged disruption to rapid de-escalation, could materially shift FX dynamics.
In this environment, terms of trade and energy exposure are key differentiators. Energy exporters and high-carry markets continue to offer opportunities, while importers face growing macro headwinds. Emerging markets, particularly in LatAm, stand out for their relative resilience, although political cycles and elections will drive divergence.
Overall, we are entering a more volatile FX regime where geopolitics, energy, and policy responses will dominate. This creates both risks and opportunities for investors willing to navigate an increasingly complex landscape.