Market overview

Oil remains centre stage, with Brent briefly moving above $100 per barrel as fresh disruption in the Gulf reignited supply concerns. Reports of attacks on shipping, evacuations from a key Omani export terminal and tighter Chinese fuel-export restrictions have reinforced the view that any relief from emergency stockpile releases may prove short-lived.

For FX, the message is clear. Higher oil is lifting inflation expectations, tightening financial conditions and supporting the dollar. The IEA’s planned release of emergency reserves has steadied sentiment slightly, but it has not changed the broader market picture. Until energy flows improve, currencies are likely to stay driven by the commodity complex rather than domestic data.

US CPI was broadly in line with expectations, with headline inflation rising 0.3% month on month and core up 0.2%. That offered some reassurance on underlying price pressures, but the market focus has already shifted back to the inflation risk posed by a prolonged energy shock.

USD: Higher oil keeps the dollar supported

The dollar remains the clearest beneficiary of the latest move higher in crude. Softer inflation signals have had little impact, with US yields still edging higher and the greenback supported by both risk aversion and renewed inflation concerns.

The key question is how long the shock lasts. If disruption fades quickly, the inflation hit may stay limited to fuel and food. If it persists, the pass-through into the broader price basket becomes harder to ignore. For now, the dollar remains well supported while geopolitical risks dominate.

GBP: Sterling holds up, but risks remain

Sterling has performed relatively well, outperforming the euro and several G10 peers. That resilience reflects a sharp repricing in UK rate expectations, with higher energy costs seen as making it harder for the Bank of England to ease policy.

That has given the pound some support, particularly against the euro. Still, the backdrop is not straightforward. A softer UK labour market should help limit second-round inflation pressure, and that still points to eventual BoE cuts over time.

Sterling is also vulnerable if market sentiment deteriorates more sharply. The UK’s reliance on foreign capital means the pound can come under pressure quickly when risk appetite weakens.

EUR: Energy exposure keeps the euro under pressure

The euro remains under pressure, and the release of emergency oil reserves has done little to change that. EUR/USD is still struggling, with the market viewing reserve releases as a temporary buffer rather than a lasting fix.

The problem for Europe is broader than oil alone. Higher energy costs continue to weigh on inflation, freight and industrial margins, worsening the eurozone’s terms of trade. That leaves the euro more exposed while supply routes remain disrupted.

This also helps explain why ECB pricing is having less influence on the currency. Right now, energy dynamics matter far more than rate differentials, and that should keep the euro on the defensive near term.

Looking ahead

• Oil headlines should remain the main near-term driver for FX

• The dollar is likely to stay supported while crude remains elevated

• Sterling may continue to outperform the euro, though broader risk aversion would be a threat

• The euro remains vulnerable to further energy-driven pressure

• Any credible de-escalation could unwind some recent dollar strength