Market overview: Oil keeps macro in the driving seat

Markets are still trading to the rhythm of Middle East headlines, with oil firmly setting the tone across FX, rates and equities. Risk sentiment improved as talk of reserve releases and official efforts to contain energy prices helped Brent pull back from recent highs, allowing stocks and bonds to recover and the dollar to surrender part of its safe-haven bid.

That recovery still looks delicate. Messaging from Washington remains inconsistent, and traders are balancing hopes of de-escalation against the risk of a more prolonged disruption to energy infrastructure and shipping routes. With the Strait of Hormuz still the key flashpoint, crude remains highly sensitive to every development. The options market continues to signal concern over higher prices, and while a move back towards USD 100 in WTI is not the base case, it is no longer difficult to imagine.

For now, reserve releases may help steady conditions in the near term, but they do not resolve the underlying issue. Only a credible easing in military tensions is likely to push oil materially and sustainably lower. Until then, macro markets are likely to remain reactive, with central bank pricing and FX direction continuing to take their lead from energy.

USD: Safe-haven support fades, but only partially

The dollar has given back some recent gains as oil eased and broader market sentiment stabilised, but the pullback looks limited for now. Brent’s retreat below USD 90 has taken some urgency out of the defensive dollar bid, yet the broader backdrop still argues against a deeper reversal unless there is a clearer shift towards de-escalation.

Price action continues to reflect oil rather than domestic macro. Volatility in crude has driven the main swings across bonds, equities and FX, leaving few independent catalysts for the dollar. Even so, FX volatility has remained relatively contained, helped by the resilience in equities and the absence of a more disorderly flight to safety.

US February CPI is the main scheduled release today. A firmer core print could place some upward pressure on Treasury yields, particularly if it comes in above consensus, but the market’s reaction may still be secondary to developments in energy. In the near term, the dollar should stay supported unless geopolitical headlines become decisively more constructive.

GBP: Sterling backed by rates repricing

Sterling has recovered ground against the dollar and continues to outperform the euro, helped by a sharp repricing in Bank of England expectations. UK rates have been highly sensitive to the recent energy shock, reflecting the market’s view that the BoE has less room than many peers to absorb a renewed inflation pulse.

That logic has supported the pound. Even though energy prices have eased from their peaks, markets remain alert to the UK’s inflation backdrop, where headline inflation is still elevated and services inflation remains sticky. This has pushed sterling rates higher relative to the eurozone and helped underpin GBP crosses.

Against the dollar, the pound has held up well after repeatedly finding support on dips, suggesting downside momentum has faded for now. Against the euro, sterling has been even more resilient, as UK monetary policy expectations have shifted more aggressively than those for the ECB. Even so, the sustainability of the move still depends heavily on energy markets. Without a more durable decline in oil and gas prices, sterling’s gains may prove harder to extend.

EUR: Euro steadies, but energy remains the key risk

The euro has so far shown reasonable resilience, consolidating around the 1.16 area against the dollar despite the geopolitical shock. That stability reflects a market still willing to buy dips, particularly on the view that the eurozone is better positioned than in 2022 to absorb an energy shock.

Even so, the single currency remains vulnerable. Any near-term support from reserve releases or calmer rhetoric is unlikely to amount to much unless it is followed by a genuine de-escalation in the conflict. Oil remains the dominant driver for EUR/USD, and that limits the influence of rate pricing on the currency for now.

ECB rhetoric has turned firmer at the margin, with policymakers signalling little tolerance for another energy-led inflation wave. Markets have responded by pricing a more hawkish policy path, although that may still be overdone. In any case, the euro’s immediate direction is still more likely to be shaped by crude than by the front end of the ECB curve. For now, the 1.16 area looks like an important near-term anchor, but it remains a fragile one.

Looking ahead

• US CPI is the main data event today, though oil is likely to remain the dominant market driver.

• Any announcement on strategic reserve releases could help cap near-term upside in crude, but only temporarily.

• Headlines on the Strait of Hormuz, refinery disruptions and tanker security remain critical for FX direction.

• For the dollar, further downside likely requires clearer evidence of de-escalation.

• For sterling, support should hold while UK rate expectations remain firm relative to peers.

• For the euro, sustained upside still depends on a more convincing easing in energy market stress.