Market overview

Markets are still being driven by headlines. Hopes that Washington may be exploring a diplomatic exit have taken some heat out of oil and trimmed the dollar’s recent gains, but the move has lacked follow-through. Investors want evidence from Tehran, not just signals from the US.

That caution is understandable. Iran still holds meaningful leverage through the energy channel, with the Strait of Hormuz firmly in focus. Until there is a clearer shift from Tehran, any pullback in oil, softer dollar tone or improvement in broader risk sentiment is likely to prove fragile.

There are also reports that regional neighbours may take a more active role after Iranian strikes on Gulf ports, energy infrastructure and airports since the conflict began on 28 February. That raises the pressure on all sides and could yet strengthen the case for de-escalation.

Macro data are also beginning to show the strain. US and euro area PMIs both point to softer growth and firmer prices, reinforcing the sense that the current shock is pushing major economies towards a more synchronised stagflationary backdrop.

USD: Dollar still supported, but upside is losing momentum

The dollar remains underpinned by geopolitical uncertainty, though the rally has started to look stretched. DXY is still holding above its 21-day moving average at 99.090, which suggests near-term momentum remains constructive. Even so, the index has struggled to build on the one-year high of 100.540 reached on 13 March, despite oil holding close to $100 per barrel.

US data have not offered a strong fresh catalyst. March S&P PMIs showed activity cooling to an almost one-year low, with the composite index slipping to 51.4 from 51.9 and services easing to 51.1 from 51.7. Manufacturing was firmer at 52.4 from 51.6, but the broader message is one of softer demand and firmer price pressure.

For now, the market still assigns the dollar a geopolitical premium. But if diplomatic signals become more concrete, a move below the 21-day average would look increasingly justified.

GBP: Sterling benefits from hawkish repricing, but the quality of support matters

Sterling has recovered strongly this week, particularly against commodity-linked currencies, as lower oil prices have helped sentiment. The pound has also outperformed against both defensive and cyclical peers, suggesting the rebound is not purely a risk story.

The rates channel is also back in play. Markets have repriced Bank of England expectations in a more hawkish direction, and that has fed through into FX more cleanly as risk appetite has stabilised. Even so, we would be cautious about extrapolating that support too far. Higher UK rate expectations are being driven less by stronger fundamentals and more by inflation risk.

This morning’s UK inflation release was broadly as expected at the headline level, with CPI at 3.0% year on year in February, but the underlying details were firmer. Core CPI printed at 3.2% against 3.1% expected, while services CPI came in at 4.3% versus 4.2% expected. That keeps the focus on sticky domestic inflation.

The key point is that this was still a pre-conflict snapshot. Since then, energy prices and cost pressures have moved higher. PMI evidence already suggests firms are seeing a sharp rise in input costs, which should keep the market focused on the risk of a more persistent inflation pulse. That may continue to support sterling in relative terms, but it is not an especially comfortable foundation.

EUR: Range trade intact as markets wait for something more credible

EUR/USD continues to hover around 1.16, with the 21-day moving average at 1.1615 capping attempts to push higher. The pair has recovered from its lows earlier this month, helped by a steadier energy backdrop and a firmer ECB tone, but the rebound remains tentative. On a month-to-date basis, EUR/USD is still around 2% lower.

Euro area PMIs told a familiar story. Services activity softened, while price pressures remained elevated. Manufacturing held up better, which is not especially surprising. Inventory buffers and pre-planned production schedules often delay the full impact in factory data, while the first signs of caution typically show up more quickly in discretionary services such as travel, hospitality and leisure.

That makes the latest survey data a useful early read on the economic drag from the conflict, though hard data will matter more from here. Industrial production and retail sales should give a clearer sense of whether weaker sentiment is feeding into real activity.

In the near term, EUR/USD remains a headline-driven trade. If de-escalation becomes more credible, first resistance comes at 1.1615, followed by the 10 March high at 1.1675. The 200-day moving average at 1.1685 is the more important marker for the broader trend.

Looking ahead

• Watch for any tangible response from Tehran, as that remains the missing piece for a more durable improvement in risk sentiment.
• Keep the Strait of Hormuz at the centre of the macro reaction function, given its importance for oil and the dollar.
• Monitor whether softer PMI sentiment starts to show up in harder activity data, especially retail sales and industrial production.
• In FX, focus on DXY versus the 21-day moving average at 99.090 and EUR/USD resistance at 1.1615, and 1.1685.
• For sterling, the key question is whether hawkish BoE repricing can continue to offset concerns over a more inflationary, less growth-friendly UK backdrop.