Market overview

Markets remain headline-driven, with the Middle East conflict entering a more dangerous phase and volatility staying elevated across rates, FX and energy. Iran’s rejection of a US-backed truce proposal has kept escalation risk firmly in focus, while concern around critical infrastructure and shipping routes has sharpened attention on supply disruption.

The clearest transmission channel is oil. WTI’s move through $111 a barrel has reignited inflation concerns just as growth expectations were already softening. That is an uncomfortable mix for risk assets. Higher energy prices are feeding through into costs, survey data is beginning to reflect the strain, and investors are being pushed to price a tougher macro backdrop of weaker activity and firmer inflation.

US labour data has offered one partial offset. March payrolls surprised to the upside, with hiring in healthcare, construction and manufacturing helping to steady sentiment. Even so, the broader picture remains uneven, and markets remain alert to the risk that a sustained rise in oil prices ultimately weighs on demand, margins and hiring.

USD: Safe-haven support returns

The dollar is regaining support from two familiar drivers: defensive positioning and renewed inflation repricing. As geopolitical risk rises and energy costs climb, the market is rotating back towards the greenback, particularly with the US still looking more resilient than most major peers.

That relative resilience matters. Services data has softened and cost pressures have picked up, but the latest labour figures reminded investors that the US economy is not rolling over. For now, that leaves the Federal Reserve with less pressure to ease and gives the dollar a solid near-term foundation.

The result is a constructive backdrop for USD. Unless tensions ease quickly and oil retraces sharply, dips in the dollar are likely to find buyers, especially against currencies with greater exposure to the energy shock.

GBP: Stability on the surface, pressure underneath

Sterling has been calmer than moves in oil and equities might suggest. GBP/USD has so far held above 1.32, but the backdrop is becoming less forgiving. A firmer dollar, sticky inflation risks and a more awkward policy mix leave the pound vulnerable if energy markets remain unsettled.

The Bank of England faces a familiar challenge. If it is slow to respond to another energy-led inflation pulse, investors may demand a higher inflation premium in gilts and sterling alike. Governor Bailey’s recent pushback against rate expectations only reinforces that tension. The UK has avoided the deep downturn once feared, but that does not insulate it from another supply-side shock.

Against the euro, sterling still looks better supported. Higher UK rates and the absence of the fiscal anxiety seen late last year should help keep GBP/EUR underpinned around the 1.1400 to 1.1428 area. Even so, upside may remain limited, with political risk and stretched positioning likely to cap any stronger recovery.

EUR: Energy exposure keeps rallies shallow

The euro remains under pressure. EUR/USD has dropped sharply since the conflict began, falling from 1.19 to just above 1.14 as risk aversion picked up and the terms-of-trade shock moved firmly in the dollar’s favour. The pair may be trying to stabilise, but the broader setup still argues against chasing strength.

Technically, EUR/USD remains trapped in a 1.14 to 1.16 range, with the 50-week moving average near 1.1622 continuing to cap rallies. Until that changes, the price action still points to a market more comfortable selling recoveries than building a sustained long position.

The macro backdrop tells the same story. Forward-looking surveys already show longer delivery times, higher input costs and firmer output prices. In the euro area, factory cost pressures are accelerating again, underlining how exposed Europe remains to another energy shock. With the US still showing greater economic resilience, the balance of risks remains tilted towards a softer euro.

Looking ahead

• Wednesday: US bond auctions and FOMC minutes will be watched closely for any shift in the Fed’s reaction function.
• Thursday: Core PCE should offer a clearer read on whether inflation pressure is broadening beyond energy.
• Friday: CPI is likely to be the key macro event of the week, with investors alert to a renewed rise in annual price pressures.
• Earnings season begins: Results from Delta, Exxon and Shell should provide an early look at how corporates are absorbing higher input costs and softer demand conditions.
• Geopolitics remains the key risk: Any further disruption to energy infrastructure or shipping through the Strait of Hormuz would keep the dollar supported, weigh on the euro and test sterling’s resilience.