Market overview

Risk appetite has firmed over the past 24 hours on slightly more constructive headlines from the Middle East, but markets are not yet ready to fully embrace a de-escalation trade. Iran continues to reject the idea that ceasefire talks with Washington are under way, though some investors may see that as an effort to preserve the support from elevated oil prices for as long as possible.

For now, oil remains the key macro anchor. With crude still above $100 per barrel, the case for a deeper dollar sell-off is unconvincing, and the greenback has already shown better stability after Monday’s sharp decline. In rates, recent central bank rhetoric has offered little fresh direction. The market is reverting to a simpler framework where energy prices are doing most of the work.

USD: Oil keeps the dollar underpinned

The dollar has steadied after the early-week washout, helped by the market’s reluctance to extend the de-escalation narrative without firmer evidence. In our view, a move in DXY back below 99.0 still requires clearer confirmation that peace talks are genuinely progressing.

Fed commentary this week has carried a mildly hawkish tone, but there has been little that meaningfully shifts the policy outlook. That fits with the view that the FOMC communication impulse would fade quickly. At this stage, oil is the cleaner signal for rate expectations than Fed rhetoric itself.

With the US data calendar light, today’s focus falls on jobless claims and remarks from Cook, Miran, Jefferson and Barr.

GBP: BoE hawks meet a softer growth backdrop

Sterling has lost some momentum against both the dollar and the euro as investors reassess the UK outlook. Bank of England speakers remain important, but the market is increasingly focused on the risk that higher energy costs and weaker demand begin to weigh more visibly on activity.

Megan Greene has retained a hawkish bias on inflation, while Sarah Breeden suggested she could have supported a cut at last week’s meeting were it not for the jump in energy prices. Alan Taylor remains the clearest dove, arguing that temporary energy shocks should not materially alter the medium-term inflation picture. Any repeat of that message is unlikely to surprise markets.

At the same time, domestic data are becoming harder to ignore. The latest BRC consumer confidence figures were notably weak, with expectations for the economy over the next three months falling sharply. That adds to the case for a slowdown in consumption and a softer services backdrop. Rate expectations have adjusted accordingly, with markets now pricing around 60bp of further tightening this year, down from roughly 86bp last week.

That mix leaves sterling vulnerable if growth concerns continue to build. We still see upside risk in EUR/GBP, particularly if de-escalation encourages a larger dovish repricing in the UK curve. A move through 0.870 over the coming weeks remains our baseline.

EUR: Energy exposure keeps the single currency on the defensive

The euro has struggled to build on last week’s gains. EUR/USD slipped back below 1.16 despite the improvement in broader risk sentiment, suggesting that some of the earlier move was driven by position adjustment rather than a durable shift in fundamentals.

Part of that earlier strength followed the ECB’s unexpectedly firm tone, but the market has since pared back expectations for near-term tightening as oil prices have eased from their highs. Pricing for an April ECB hike reached 22bp on Monday, briefly dropped to 14bp, and has since recovered modestly to 17bp. That path has tracked energy markets closely.

ECB rhetoric remains watchful rather than uniformly hawkish. Christine Lagarde has signalled that the Governing Council would not be paralysed by hesitation, while François Villeroy struck a more cautious note by arguing it is still too early to debate the timing of any move.

The broader macro backdrop is also becoming more difficult for the euro. Europe remains especially exposed to the energy shock, and that is feeding directly into sentiment. Germany’s latest Ifo survey showed a marked deterioration in both current conditions and expectations, underlining how quickly the recovery narrative has been pushed back. With gas storage levels low and supply concerns still elevated, the eurozone terms-of-trade story remains a headwind.

Technically and fundamentally, EUR/USD still looks constrained. Repeated failure near the 21-day moving average points to rallies being sold, and unless there is tangible progress on Gulf de-escalation and greater stability in energy markets, upside around the 1.16 area should remain limited. In that scenario, a return below 1.150 looks plausible.

Looking ahead

• US: Jobless claims and remarks from Cook, Miran, Jefferson and Barr
• UK: Speeches from Breeden, Taylor and Greene
• Eurozone: Comments from Guindos and Muller
• Market focus: Oil remains the clearest driver for FX and rates
• Key theme: Without firmer signs of de-escalation, defensive dollar support is likely to persist