Market overview

The market’s brief improvement in sentiment has proved short-lived. A softer dollar and modest rebound in sterling ran out of steam after President Trump struck a far more confrontational tone overnight, signalling that US operations in the Middle East could continue for another two to three weeks.

While reports that Iran had sought a ceasefire briefly encouraged hopes of de-escalation, those hopes now look premature. Any pause appears tied to the reopening of the Strait of Hormuz, and Washington’s latest messaging suggests the US is seeking meaningful concessions rather than a quick exit. Oil has moved higher again, risk appetite has deteriorated, and defensive positioning is back in demand.

The immediate market reaction has been familiar: the dollar is firmer, sterling has given back part of its midweek recovery, and EUR/USD has slipped back towards recent lows. The absence of any clear roadmap to end the conflict has left investors with little reason to extend the recent recovery in risk-sensitive assets.

USD: Haven demand reasserts itself

The dollar is back on the front foot as geopolitical risk regains control of price action. Yesterday’s move against the greenback was driven by hopes that the conflict was nearing its end, but that narrative has now been challenged by the White House’s latest remarks and Iran’s subsequent missile response.

Fed speakers Lorie Logan and Michelle Bowman are due today, but Chair Powell’s more dovish remarks earlier in the week are still shaping expectations. Even so, geopolitics is dominating the near-term picture, and that is keeping demand for the dollar supported.

Tomorrow’s non-farm payrolls are the next major domestic test. The report is unlikely to capture much of the conflict’s economic effect yet, but it should offer another read on the underlying condition of the labour market. ADP payrolls came in stronger than expected at 62k, while the ISM manufacturing employment index was little changed at 48.7. Consensus looks for 65k payroll growth, with unemployment seen steady at 4.4%. Any surprise higher in the jobless rate could generate an outsized market reaction.

GBP: Bailey pushes back on rate pricing

Sterling’s recovery has faded as global sentiment has turned lower and the Bank of England has sought to cool aggressive tightening expectations. Governor Bailey told Reuters that markets were moving too quickly in pricing a run of rate rises this year, a notable intervention given the sharp repricing in front-end UK rates over recent weeks.

That repricing has been significant. Two-year swap rates rose by more than 100bp last month, tightening financial conditions and raising concerns about the impact on households and businesses. Bailey’s message was clear: the BoE must deliver on its mandate without inflicting unnecessary damage on the economy.

The focus now shifts to the BoE’s Decision Maker Panel survey. Of particular interest will be whether firms see enough pricing power to pass on higher input costs, and whether wage expectations continue to build. If the survey points to subdued selling price expectations and only contained wage pressure, markets may further scale back the roughly 50bp of tightening currently priced for this year. In that scenario, EUR/GBP could drift back towards the 0.8790 to 0.8800 area.

EUR: Better supported, but policy still matters

EUR/USD has retreated as the dollar regains its haven bid, with the pair falling back towards 1.150 after trading comfortably above 1.160. Even so, positioning suggests the euro may be better placed than before to withstand volatility if the geopolitical backdrop improves.

Latest CFTC data points to broadly neutral speculative positioning in EUR/USD as of 24 March, a marked contrast to the more extended net-long setup seen earlier in the month. That should leave the single currency on firmer footing if markets get any genuine de-escalation signal over the weekend.

Beyond geopolitics, the ECB remains central to the euro outlook. Markets have been tempted to unwind some tightening expectations, but hawkish rhetoric from policymakers may stop pricing from falling much below two further hikes, currently around 67bp. Unless the ECB softens its tone materially, the euro still has scope to outperform on crosses if external risks begin to ease.

Looking ahead

• Fed speakers Lorie Logan and Michelle Bowman remain on the radar today.
• US non-farm payrolls are the key event tomorrow, with consensus at 65k and unemployment seen at 4.4%.
• The BoE Decision Maker Panel survey should provide a useful read on pricing power and wage expectations in the UK.
• Oil and headlines from the Middle East will continue to set the tone for FX.
• Liquidity is likely to thin out tomorrow and Monday because of the Easter holiday period.