Market overview

Geopolitics remains the market’s main macro anchor, with the latest US moves keeping pressure firmly on the Middle East. Heavier military positioning, tougher language around Iranian energy infrastructure and little visible diplomatic progress have left investors reluctant to fade the risk premium. Brief pauses in hostilities have not changed the broader picture. Oil remains well supported, risk appetite is fragile and cross-asset pricing still reflects a market preparing for a longer period of tension.

That backdrop continues to shape broader market behaviour. US equities are still showing a familiar pattern of late-week weakness followed by early-week recovery, but the more important development is the resilience in crude. Firm energy prices have helped push the dollar to fresh multi-month highs, with investors leaning into the relative advantage of the US as a major domestic energy producer. At the same time, bonds have started to send a more cautious signal. The latest rally in government debt, led by the long end, suggests markets are becoming more sensitive to the longer-run growth damage from a sustained energy shock.

USD: Oil support keeps the dollar bid

The dollar remains underpinned by the combination of higher crude, softer global risk sentiment and the US economy’s stronger energy position relative to its peers. In simple terms, the current shock is improving the dollar’s terms-of-trade appeal. That has kept USD demand firm even as broader markets wrestle with the growth implications of a prolonged conflict.

That support is not unconditional. If oil were to stay at extreme levels for an extended period, recession risks in the US would rise sharply and the market would start to question how long the dollar can benefit from the energy story. For now, however, the near-term reaction function is clear. Stronger US data should keep the dollar supported, while softer releases would challenge it by dragging rate expectations lower and raising concerns that the economy is starting to buckle under the weight of higher energy costs.

Today’s US data mix may point in both directions. JOLTS could still look relatively firm, but consumer confidence is expected to remain weak. That may leave the market less willing to chase the dollar aggressively at current levels, particularly with DXY testing the top of its recent range and month-end rebalancing flows potentially generating some USD selling.

GBP: Sterling remains exposed to the external shock

Sterling has come under sustained pressure, with GBP/USD extending its decline and now breaking below the 1.32 area that had previously acted as support. That leaves 1.30 as the next major downside level and keeps the near-term bias skewed to the downside. In the current environment, sterling is struggling to compete with currencies backed by energy production or broader commodity exposure.

The UK’s vulnerability is straightforward. It remains exposed to higher imported energy costs at a time when domestic growth momentum is already soft. Recent UK data has offered little relief. Business sentiment has held up only selectively, while consumer-facing indicators continue to point to a cautious household sector. Retail demand has softened, confidence remains fragile and the economy looks less well placed to absorb another externally driven inflation shock than it was a few years ago.

Performance against peers tells the same story. Sterling’s largest declines this year have come against commodity-linked currencies, reinforcing the view that the market is punishing energy importers and rewarding economies with stronger external buffers. Unless tensions ease materially and oil starts to retreat, rallies in GBP/USD are likely to remain limited.

EUR: Growth concerns are starting to outweigh the rates story

The euro is also struggling to find support, and the price action increasingly suggests that relative growth expectations matter more than inflation or nominal rate spreads. Germany’s stronger-than-expected inflation print did little to change the tone, with EUR/USD still closing lower on the day. That is a useful reminder that higher inflation is not automatically currency-positive when it is being driven by an adverse energy shock.

For the euro area, the problem is clear. The region is significantly more dependent on imported energy than the US, leaving it more exposed if oil remains elevated. That shifts the focus away from a simple rates-for-longer narrative and towards the weaker growth outlook that higher energy costs imply. The relative move in long-dated yields supports that interpretation, with stronger demand for US duration reinforcing the dollar’s advantage over the euro.

Real-rate dynamics also offer limited encouragement for the single currency. Even where nominal spreads appear to narrow in the euro’s favour, the inflation-adjusted picture is less supportive once higher inflation expectations are stripped out. From both a growth and real-yield perspective, the euro backdrop remains soft. EUR/USD therefore still looks vulnerable, with the March low near 1.1411 remaining an important downside marker.

Looking ahead

• US JOLTS, ADP and Friday’s payrolls will be central for the dollar, particularly if labour-market resilience keeps Fed expectations firm.
• Eurozone CPI is the key event for the euro, though inflation alone may not be enough to offset deteriorating growth expectations.
• Month-end rebalancing flows could weigh on the dollar after US asset outperformance this month.
• Headlines from Washington and Tehran remain critical. Any credible sign of de-escalation would likely hit oil, support risk sentiment and take some heat out of the dollar.