Market overview

The macro picture remains unusually split. US inflation is cooling broadly in line with expectations, yet growth has weakened sharply and would, in normal conditions, argue for a softer dollar. Instead, FX markets are being driven less by domestic data and more by geopolitics, with higher energy prices and renewed haven demand keeping the dollar firmly supported.

Brent has surged above $106 per barrel after US strikes on Iranian targets linked to export infrastructure, reinforcing concerns over the security of regional supply and the continued disruption around the Strait of Hormuz. That leaves markets heading into a dense central bank calendar with little expectation of immediate policy action. The RBA, Fed, Bank of Canada, BoJ, ECB, BoE and SNB all meet this week, with the RBA the only central bank where a move remains live. Although emergency stock releases have offered some relief, the market remains focused on the much larger volume of physical supply still at risk. As a result, terms of trade have re-emerged as a key driver across G10 FX, particularly for energy-importing economies.

For now, the tone of policy communication matters more than rates themselves, especially while the conflict premium in oil remains elevated.

USD: Haven demand keeps the dollar in control

The dollar continues to trade from a position of strength despite softer US activity data. January PCE inflation printed at 2.8%, in line with expectations, while fourth-quarter GDP was revised sharply lower to 0.7%. Under a more stable backdrop, that combination would likely have pushed markets towards a more dovish Fed view and weighed on the greenback. Instead, geopolitical stress and higher oil have kept the dollar well bid.

DXY has pushed above the 100 mark and is testing the top of its multi-month range, supported by haven demand and a market that has become increasingly reluctant to price Fed easing. This week’s FOMC meeting could reinforce that bias. The Fed is unlikely to validate expectations for easier policy while energy prices are rising and inflation risks are moving higher again. With the market still assigning some probability to further easing this year, the risk is that the Fed leans modestly hawkish relative to pricing.

Near term, the dollar likely remains supported unless there is a credible shift towards de-escalation in the Middle East. Without that, investors may be reluctant to fade the move, particularly while energy markets remain tight and global risk sentiment fragile.

GBP: Relative resilience, but support looks conditional

Sterling has held up better than the euro since the latest escalation in the Middle East, helped by a sharper repricing in UK rates and the view that the Bank of England will remain cautious on easing while energy-driven inflation risks persist. That relative resilience, however, was tested by soft January activity data, with monthly GDP flat and industrial production slightly weaker.

The BoE’s challenge is straightforward. Inflation has been sticky for some time, and any renewed rise in oil prices complicates the path back to target. Markets have responded by scaling back expectations for rate cuts and, in some cases, entertaining a more hawkish medium-term path. That has provided support for sterling, particularly against the euro, where the UK’s yield advantage has become more visible again.

Still, the durability of that support is far from assured. Sterling’s current backing depends heavily on the conflict narrative and on the assumption that UK rates will remain relatively firm. Any sign of de-escalation could reverse part of that repricing and leave sterling exposed, particularly given the weak domestic growth backdrop and lingering concerns around UK fiscal credibility. Against the dollar, further downside in GBP/USD remains plausible while the dollar stays supported by haven demand. Against the euro, gains may extend, but a sustained move materially above 1.16 still looks less straightforward.

EUR: Energy exposure leaves the euro vulnerable

The euro remains under pressure as markets focus on Europe’s sensitivity to higher oil and gas prices. EUR/USD has fallen notably since the crisis began, with the earlier support from a softer US macro story giving way to renewed concern over Europe’s external vulnerability. In the current environment, energy matters more than rate spreads.

This is a familiar pattern. When Europe’s terms of trade deteriorate sharply, the euro tends to struggle regardless of how firm ECB rhetoric may be. That dynamic appears to be reasserting itself. The ECB is widely expected to leave rates unchanged this week, and while it may signal flexibility if energy disruption worsens, policy nuance is unlikely to be the main driver for the single currency in the near term.

Markets are also watching wider European asset pricing more carefully, with peripheral spreads drifting wider after previously tight levels. For now, that looks more like position adjustment than a broader stress event, but it adds another layer of caution around the euro. Unless there is a clear improvement in energy flows or a convincing diplomatic breakthrough, the single currency is likely to remain on the defensive.

Looking ahead

• RBA on Tuesday: only G10 meeting this week where a rate move is seriously in play, though expectations remain divided.

• FOMC on Wednesday: likely the key event for the dollar, with focus on whether the Fed pushes back against easing expectations.

• BoC on Wednesday: expected to hold, with markets watching the tone on inflation and growth risks.

• BoJ, ECB, BoE and SNB on Thursday: no changes expected, but guidance will matter as markets reassess the inflation impact of higher energy prices.

• Middle East developments: any sign of de-escalation could ease pressure on oil, temper haven demand and challenge recent dollar strength.

• Strait of Hormuz headlines: still central for FX, particularly for the euro and other energy-sensitive currencies.