Market overview: Energy back in command

Markets began the week with geopolitics firmly back in focus. Weekend exchanges between Washington and Tehran pushed oil prices higher and unsettled broader risk sentiment, prompting a more defensive tone across FX. The latest rhetoric around the Strait of Hormuz has again made energy security the market’s central concern.

That has pushed central bank pricing into the background. Last week, there was a clear attempt to trade currencies through relative rate expectations, with Powell sounding mildly firm, the ECB leaning more hawkish and the BoE appearing less dovish at the margin. Even so, that story did not last. Oil remained the stronger signal and ultimately dictated direction.

The broader message is straightforward. Across G10 FX, policy expectations are still moving, but they are being filtered through the energy backdrop. Until there is more clarity on Hormuz and a calmer tone in oil, markets are likely to stay reactive, headline-driven and prone to sharp reversals.

USD: Safe-haven support returns

The dollar found renewed support as tensions in the Middle East escalated over the weekend. Higher oil prices and a more cautious risk backdrop helped restore demand for the greenback, particularly after last week’s broad pullback. In the current environment, the USD remains the market’s preferred defensive expression when geopolitical risk intensifies.

That said, last week’s weakness should not be ignored. Powell’s mildly hawkish tone failed to deliver lasting support, as investors focused instead on a more assertive ECB message and a BoE debate that looked less dovish than before. The result was a softer dollar, even though the move went further than US rate dynamics alone would suggest.

For now, the near-term USD outlook still rests heavily on the energy story. Any credible progress on Hormuz would likely reopen room for further dollar weakness. Without that, the balance of risks still favours abrupt rebounds in the USD whenever oil volatility picks up again.

GBP: Hawkish pricing meets fiscal unease

Sterling came under pressure at the end of last week as UK borrowing costs moved sharply higher. The 10-year gilt yield briefly touched 5%, a level not seen since 2008, and the move exposed just how narrow the pound’s support base has become. A more hawkish BoE has offered some support, but that support looks fragile.

Markets are now pricing more than three quarter-point hikes by year-end. That looks too aggressive against the domestic backdrop. Growth remains soft, the labour market is easing and higher energy prices only increase the risk of weaker activity alongside firmer inflation. The BoE may sound cautious on inflation, but it is difficult to see it embracing such an aggressive path with confidence.

At the same time, the move in gilts has revived concern over the UK’s fiscal position. When the pound and government bonds fall together, investors are usually signalling discomfort with the broader policy mix. With borrowing costs rising and political pressure likely to build into the May local elections, sterling still faces a difficult medium-term backdrop.

EUR: ECB support remains, but the market has moved a long way

The euro continues to draw support from a more hawkish ECB narrative. Markets have quickly shifted towards the view that the Bank has finished easing and may be prepared to respond more forcefully if inflation pressures persist. That repricing has helped the single currency hold up relatively well, even in a less stable risk environment.

ECB communication has clearly played a major role. Several policymakers have reinforced the message that further tightening cannot be ruled out, and the market has responded by pushing euro rate expectations materially higher. April is now seen as a live meeting, with an increasingly firm path priced over the rest of the year.

The issue is that much of that adjustment may already be in the price. That leaves the euro vulnerable if incoming ECB rhetoric becomes more balanced or if growth data begin to soften more clearly. With energy costs elevated and sentiment indicators under pressure, EUR support from rates may persist in the short term, but upside from here looks less straightforward.

Looking ahead

• Global PMIs should give the first indication of how the latest geopolitical shock is feeding into demand and pricing.
• Developments around the Strait of Hormuz remain the key driver for oil, risk sentiment and near-term USD direction.
• UK CPI may attract attention, but markets may treat it as dated relative to the recent move in energy and rates.
• ECB speakers will be closely watched after the sharp repricing in euro rate expectations.
• Across FX, energy remains the dominant anchor, with policy signals still playing a secondary role.