Risk sentiment is turning positive, but the story is far from simple. Here is what is driving markets right now:

• Risk Appetite Returns

Investors are rotating back into risk assets as signs of progress in US–Iran diplomacy emerge. The shift reflects easing fears of a major oil shock and a move away from extreme defensive positioning.

• US Dollar Softens
  The dollar is under pressure as capital flows into equities, especially across Asian markets. However, downside may be limited with DXY expected to find support around the 97.65–97.75 zone amid lingering geopolitical uncertainty.

• Oil Market on Edge
  Despite diplomatic optimism, oil remains highly reactive. Attention now turns to the US EIA inventory report. A drawdown larger than the expected 2.4M barrels could trigger a sharp upside move in prices.

• Emerging Markets Strength
  Improved global sentiment and strong Chinese manufacturing data are supporting EM assets. USD/CNY is approaching yearly lows, while South Korea’s Kospi is benefiting from increased foreign investor access.

• Euro Lagging
  The euro is underperforming due to weak macro data. Markets are now focused on the ECB, with expectations building for a potential rate hike in June to manage persistent inflation pressures.

• Sterling and Political Risk
  GBP remains relatively stable, but risks are building. Upcoming local elections could introduce volatility in both the currency and UK bond markets.

What’s Next?

This rally feels more like a temporary release of pressure than a structural shift. Markets are pricing hope, not certainty. The real driver remains energy. If oil inventories continue to tighten beyond expectations, diplomacy may quickly take a back seat to supply realities. In this environment, risk-on sentiment can reverse very quickly. Until there is a clear and durable resolution in the Gulf, positioning should remain cautious rather than complacent.