Market overview

Markets head into the weekend in a cautious mood, with FX, rates and energy all taking their cue from the same source: geopolitics. Hawkish central bank pricing, firmer oil and an unhelpful stream of headlines have combined to keep risk appetite in check and defensive positioning well supported.

The broad message from price action is clear. The dollar remains firmly underpinned, oil is reinforcing that move rather than offsetting it, and investors are showing little appetite to fade the current risk premium. After months of calls for broad dollar weakness, the market is again rewarding long USD exposure. Dips are still attracting buyers, and that pattern has become more pronounced as the week has progressed.

The expiry of the latest negotiating window today only adds to the unease. With little confidence in any near-term diplomatic breakthrough, markets are reluctant to price a meaningful de-risking move into the weekend. In that setting, haven demand remains in charge and risk-sensitive assets continue to look exposed.

A more durable change in the macro backdrop is also worth noting. The old assumption that higher oil is automatically negative for the dollar no longer holds in the same way. The US has shifted from being a major energy importer to a net exporter, which means elevated commodity prices can now improve, rather than weaken, the country’s terms of trade. That structural change is making the current USD rally more credible.

USD: Haven demand and oil support align

The dollar remains the market’s preferred defensive trade. Unclear signals from Tehran and Washington, combined with persistent concern over energy supply, have kept the greenback well bid. Even the latest delay to any strike on Iranian energy infrastructure has done little to calm markets, suggesting investors are not yet willing to embrace a clean de-escalation narrative.

Oil is central here. With Brent still trading at elevated levels, the dollar continues to benefit from both safe-haven demand and the mechanical support that comes from stronger energy prices. In the current environment, higher oil is reinforcing the USD bid through improved US external dynamics and the ongoing need to fund energy purchases in dollars.

US data is likely to remain secondary to Middle East developments, although the inflation expectations component of the final University of Michigan survey could still matter at the margin. If medium-term expectations move materially higher, markets may become more willing to test the idea of further Fed tightening this year. That would add another pillar of support for the dollar and keep pressure on risk assets.

From a technical perspective, DXY continues to trade with a firm tone near the top of its recent range. A push towards the 100.25 to 100.50 area looks plausible if headline risk stays elevated and oil remains firm.

GBP: Rate support meets a softer domestic backdrop

Sterling had held up relatively well through much of March, supported by an aggressive repricing in UK rates. Markets moved from expecting cuts to pricing Bank of England hikes, and that yield adjustment did most of the work in keeping the pound resilient against both the dollar and the euro.

That support is now looking less secure. Domestic data is softening, and the UK macro backdrop is becoming harder to ignore. Consumer confidence has weakened sharply, retail demand is showing signs of fatigue and the household sector looks increasingly stretched. The UK enters this latest shock with less resilience than in previous episodes, given higher borrowing costs, thinner savings cushions and limited fiscal room to absorb another energy squeeze.

That matters because sterling remains exposed to the combination of elevated oil, fragile sentiment and slowing growth. For an energy-importing economy, this is not an easy backdrop. Markets may still respect the BoE’s hawkish bias, but rate support on its own may not be enough if growth concerns deepen.

There was some encouragement from retail sales, which fell by less than expected and pointed to a degree of pre-crisis resilience in the consumer sector. That has helped GBP hold modest weekly gains against both EUR and USD. Even so, the broader picture remains fragile, and without a sustained improvement in geopolitical conditions, rallies in GBP/USD are likely to struggle.

EUR: Vulnerable as diplomacy stalls

The euro remains on the back foot as investors scale back hopes for a quick end to the conflict. Both Washington and Tehran have laid out conditions that still appear far apart, and the market has become more sceptical of headline-led optimism. As a result, EUR/USD has continued to drift lower, with higher oil adding to the pressure.

The pair has so far avoided a full retest of the early-March lows and has managed to hold above the 1.15 area at times, but the tone remains soft. The rebound lacks conviction, and the single currency is finding it difficult to recover while energy markets stay tight and haven demand remains elevated.

There is also little sign that the market is ready to meaningfully reprice the ECB path. Hawkish pricing remains largely intact, but conviction is limited. The focus today will fall on Spain’s provisional CPI release and on any remarks from Isabel Schnabel, with investors looking for clues on whether policymakers are willing to validate current market pricing.

For now, EUR/USD still looks vulnerable. A move back towards the 1.1485 area, followed by a retest of the 1.1410 to 1.1430 region, remains a credible near-term scenario if diplomatic efforts continue to disappoint.

Looking ahead

• The close of the five-day negotiating window and any signal, or lack of one, on de-escalation before the weekend
• Final University of Michigan sentiment data, especially the inflation expectations components
• Spain’s provisional CPI release for any implications for near-term ECB pricing
• Comments from ECB officials, particularly Isabel Schnabel
• Oil price action and any further signs of strain around global fuel supply
• Whether defensive positioning extends into the weekend, keeping the dollar supported and risk assets under pressure