Market overview

Markets continue to swing on conflicting US messaging over the likely length of the conflict, leaving sentiment fragile and volatility firmly in place. Fresh escalation has only added to the pressure, with Iran’s new supreme leader vowing to keep the Strait of Hormuz effectively shut and President Trump maintaining a defiant tone.

Reports that the Strait has been mined have further rattled investors. For markets, this is a direct threat to an energy system already facing a structural supply shortfall, with crude closing above $100 a barrel yesterday for the first time since 2022.

The IEA’s 400 million-barrel release helped steady nerves briefly, but it does little to offset the scale of the risk. Around 18 million barrels per day, close to a fifth of global supply, would normally pass through Hormuz. In FX, terms of trade is back in the driving seat, overtaking rate expectations and broader macro data as the main market force.

Oxford Economics estimates that if oil averages $140 per barrel for two months, tighter financial conditions, supply-chain disruption and weaker confidence would be enough to push parts of the global economy into a mild recession.

USD: Safe-haven demand keeps the dollar supported

The dollar remains well underpinned. DXY hit a fresh 2026 high this morning and is on course for a second straight weekly gain as investors continue to favour defensive positioning. Options markets tell a similar story, with one-month risk reversals at their strongest since late 2022, pointing to firm demand for upside dollar protection.

Oil is reinforcing the move. Higher crude raises US inflation risks and reduces the scope for near-term Fed easing, supporting rate differentials against energy-importing economies. It is also a reminder that when oil dominates the macro backdrop, the dollar tends to regain its petro-currency appeal.

Markets have already pushed expectations for the next Fed cut from July to September. Attention now turns to January’s core PCE release, expected at 3.1% year-on-year, alongside US job openings data. Neither will capture the fallout from the Iran conflict, but both should feed the market’s hawkish repricing ahead of next week’s FOMC meeting.

More broadly, this month’s dollar rally has been driven less by rates and more by the economic shock from higher energy prices. US assets continue to outperform their European and Asian peers, helped by greater energy independence. That relative support for the dollar is unlikely to fade while disruption in the Gulf persists.

GBP: Sterling hit by stagflation concerns

Sterling has slipped below $1.33 as risk sentiment deteriorates and UK stagflation concerns intensify. The rise in energy prices is reviving inflation fears just as domestic activity data continues to disappoint. If tensions remain elevated, the 100-week moving average just below $1.31 could come into view.

This morning’s UK data added to the softer tone. GDP was flat in January, missing expectations and undershooting December’s 0.1% gain. Even before the latest geopolitical shock, growth was weak and the domestic backdrop remained fragile.

The BoE had been moving towards a more balanced policy debate, but the mix of softer labour data and sticky inflation was already making that harder to sustain. The latest rise in oil and gas prices now adds another complication. The BoE had expected 0.3% growth in Q1, while the OBR has warned inflation could end the year closer to 3% if energy prices stay high.

Markets have reacted by sharply scaling back easing expectations. Bank Rate is now seen holding at 3.75%, with roughly a 75% chance of a hike by year-end, a marked reversal from the cuts priced before the conflict.

EUR: Euro remains vulnerable to the oil shock

EUR/USD is extending its decline to fresh seven-month lows and is now down 2.9% month-to-date. That marks a sharp reversal from January’s multi-year high.

With no clear sign of de-escalation, markets are becoming less responsive to policy announcements aimed at easing price pressures. News of Trump’s plan to suspend the Jones Act and allow foreign tankers to help supply US refiners did little to shift sentiment.

The broader policy repricing is also working more clearly in the dollar’s favour. The US is better placed than Europe to absorb tighter conditions thanks to its domestic oil production base, while the euro remains exposed to the terms-of-trade shock from higher energy prices. With oil still near $100 a barrel, the balance of risks for EUR/USD remains skewed to the downside.

The November low at 1.1469 has already been tested this morning, with July’s 1.1392 low the next level to watch.

Looking ahead

• US core PCE and job openings data will shape the tone ahead of next week’s FOMC meeting

• Headlines on Hormuz and physical energy flows remain the key market driver

• Oil is still setting the direction across FX

• Weekend event risk should keep defensive dollar demand firm