Market overview

Energy risk is back at the centre of the FX debate as US and Iranian tensions over the Strait of Hormuz continue to block meaningful progress on reopening the key shipping route. With around a fifth of global oil flows passing through the strait, the disruption is keeping WTI above $90 and Brent above $100, leaving markets highly sensitive to any fresh inflation impulse.

The market has moved on from last week’s cleaner de-escalation trade. Investors are now focused on how long the disruption lasts, whether it can be contained, and how much risk premium should remain embedded in oil and FX. Ceasefire extensions are being treated with caution where they do not bring visible improvement in shipping flows.

That leaves the US dollar better supported, while risk sentiment has become more fragile. Equities are losing momentum, energy-importing currencies are under pressure, and central bank pricing is becoming harder to read as policymakers face the familiar trade-off between inflation risk and softer activity.

USD: Dollar finds support from oil and growth resilience

The dollar index has bounced from the 98 area as investors reassess the inflation and growth implications of higher oil. The US currency is now attempting to end a three-week losing streak, helped by renewed safe-haven demand and a terms-of-trade cushion from elevated energy prices.

US data have strengthened that support. The latest S&P Global PMIs showed both manufacturing and services beating expectations, with the US clearly outperforming Europe. That relative growth advantage should help limit dollar downside, even if risk appetite stabilises.

Rates markets are also playing a role. Prolonged energy disruption could reduce the Federal Reserve’s scope to ease, giving the dollar an additional layer of support. For now, the USD looks increasingly well placed versus low-yielding and energy-importing currencies, particularly if equities continue to struggle.

GBP: Sterling steadies, but oil remains a headwind

Sterling was relatively quiet, helped at the margin by stronger than expected April S&P PMIs. The composite index rose to 52.0 from 50.3, against expectations for a fall into contraction territory. The improvement looks less like a clean rebound in demand and more like firms pulling activity forward before further conflict-related inflation pressure feeds through.

Retail sales told a similar story. The headline March reading rose 0.7% month on month including auto fuel, ahead of a flat consensus. Excluding fuel, the gain was a more modest 0.2%, suggesting higher fuel prices played an important role in the apparent strength.

Markets may take some comfort from the Bank of England’s perceived hawkish bias, but that support is fragile. The data are still too thin to judge how the central bank will balance sticky prices against weaker growth. GBP/USD remains close to 1.34, but without a quick improvement in the Hormuz situation, the balance of risks points to a hesitant move lower. A stronger dollar and weaker risk appetite would leave 1.34 exposed as a clear downside level.

EUR: ECB caution limits euro upside

The European Central Bank is widely expected to keep rates unchanged at its 30 April meeting. Recent comments from Governing Council members have pointed to a lack of urgency, making this meeting more about managing expectations than delivering immediate action.

Markets see only a small chance of a move this week, but June remains live. Pricing has shifted between roughly 20bp and 40bp of tightening by June in recent weeks, while around 50bp is priced by year-end. The ECB is likely to keep a cautious tone, stressing that both inflation and growth risks remain significant. Christine Lagarde may avoid firm guidance, but could still leave the door open to a summer hike.

Long-term inflation expectations remain contained. The 5Y5Y inflation forward has only edged up from around 2.08% in February to 2.14%, well below the levels above 2.6% seen in 2023. That stability gives the ECB some flexibility, although persistently high oil could eventually force a firmer response.

For EUR/USD, the policy story matters, but only up to a point. The euro initially benefited from the idea that the ECB might respond more aggressively than the Fed to the energy shock. However, recent price action suggests global equities are now the bigger driver. Unless the ECB delivers a genuine surprise, EUR/USD is likely to remain more sensitive to oil and risk sentiment than to marginal changes in rate guidance.

Looking ahead

• Hormuz shipping flows remain the key geopolitical trigger for oil, inflation expectations and FX risk appetite.
• A sustained move higher in crude would favour the US dollar and pressure energy-importing currencies.
• The ECB is expected to hold rates on 30 April, with markets focused on any guidance around June.
• GBP/USD remains vulnerable if risk sentiment weakens and oil prices stay elevated.
• EUR/USD needs resilient equities to hold above recent support, unless the ECB delivers a clear hawkish surprise.