Market overview

The dollar has started the week on a softer footing as risk sentiment has steadied and oil has eased from recent highs. Even so, the broader tone remains supportive for the USD, with markets still adjusting to a more difficult macro backdrop shaped by higher energy prices and geopolitical tension.

That shift has forced a rethink across rates markets. Expectations for Fed easing have been scaled back sharply, while central banks more broadly are facing a less straightforward mix of softer growth and firmer inflation. In FX, that continues to favour the dollar, leaves the euro exposed to the energy shock and keeps sterling caught between the two.

GBP: Sterling holds firmer against the euro than the dollar

Sterling has recovered modestly over the past two sessions, helped by signs that energy disruption may remain contained for now. Even so, the Bank of England heads into its meeting facing a difficult balance between renewed inflation pressure and a softer growth backdrop.

The UK remains particularly sensitive to oil moves, with faster pass-through into fuel prices and inflation expectations than in much of Europe. That keeps the pound vulnerable when energy markets are volatile.

For now, GBP looks more resilient against the EUR than against the USD. The eurozone remains more exposed to the external shock, while the dollar is still benefiting from haven demand and firmer Fed pricing.

USD: Fed repricing and haven demand keep the greenback supported

The USD remains underpinned by a sharp repricing in Fed expectations and by its role as the market’s preferred defensive currency. A hold from the Fed is fully expected, but updated forecasts and Chair Powell’s tone will be the main focus.

The challenge for the Fed is that the latest shock is both inflationary and growth-negative. That should keep policymakers cautious, with lower growth projections, slightly higher inflation forecasts and limited conviction around the rate path.

That backdrop remains supportive for the dollar. Yield spreads suggest the move may have stretched somewhat, but the USD is still the clearest expression of geopolitical uncertainty when oil is the main transmission channel.

EUR: The rebound still looks fragile

The euro has bounced from recent lows, but the recovery still looks unconvincing. With the ECB also expected to stay on hold, the focus will be on whether policymakers sound more concerned about energy-driven inflation risks.

Unlike in 2022, inflation is closer to target and growth is already weak, which argues against any near-term tightening response. Even so, higher energy prices complicate the outlook and may push the ECB towards a firmer tone.

For EUR/USD, the bias still looks lower. Europe remains more exposed to a sustained oil shock, and unless the geopolitical backdrop improves, the pair could drift back towards recent lows.

Looking ahead

• Fed: focus on projections, the dot plot and Powell’s tone

• BoE: balancing renewed inflation risk against softer activity

• ECB: hold expected, but guidance may turn firmer

• Oil: still the key market driver

• FX bias: USD supported, EUR vulnerable, GBP firmer versus EUR than USD