USD: Dollar supported by oil surge

The Middle East conflict has entered its tenth day and energy markets are reacting forcefully. Brent crude surged above the $100 per barrel threshold in the Asian session and briefly pushed toward $120, marking the largest intraday jump since April 2020. Supply disruptions are intensifying as producers reduce output and the Strait of Hormuz remains effectively constrained, keeping markets focused on the risk of further tightening in global oil supply.

Supply concerns have intensified as the UAE and Kuwait joined Iraq in cutting output, while storage constraints linked to the blocked Strait of Hormuz are worsening the disruption. Political uncertainty in Iran has also increased following the appointment of Ayatollah Ali Khamenei’s son as supreme leader, a move criticised by US President Donald Trump.

The US dollar has broadly tracked the rise in oil prices, extending gains in early trading and ending last week roughly 1.4% higher. However, a weaker US labour market report on Friday limited the advance. Payrolls fell by 86k in February and the unemployment rate edged up to 4.4%.

Although weather disruptions and strike activity may have influenced the data, the report raised questions about the resilience of the labour market. The dollar’s reaction was notable, with the DXY slipping 0.3% despite support from higher oil prices.

Near term, elevated energy prices should continue to support the dollar. However, higher fuel costs risk intensifying US cost-of-living pressures and introducing political uncertainty ahead of the May mid-term elections.

Markets are also watching the expected leadership transition at the Federal Reserve, where Kevin Warsh is widely seen as President Trump’s likely successor to Jerome Powell in May.

Reports that the G7 may discuss a coordinated release of strategic reserves through the International Energy Agency could briefly calm energy markets. However, without clear signs of de-escalation, dollar support is likely to remain intact.

Technically, the DXY has again tested the 99.65 to 99.70 region and could challenge the 100 area this week.

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GBP: Energy shock complicates UK outlook

Sterling is trading in a difficult environment as higher energy prices drive global risk aversion and push interest rates higher.

Brent crude is roughly 50% higher than when the conflict began. If these levels persist, the inflation outlook for the UK could deteriorate further.

Unlike the euro area, UK inflation had not fully stabilised before the conflict. Services inflation remains elevated near 4.4%, raising the risk that price pressures rebound after briefly easing earlier this year.

Markets have already adjusted expectations. UK OIS has largely removed the probability of another Bank of England rate cut in 2026, and persistent energy inflation could eventually raise the prospect of tighter policy.

Sterling briefly strengthened against the euro early on Monday, reaching a multi-week high near 1.1559, before easing back toward 1.1526 as oil prices pulled back from their Asian highs.

Domestic events this week include a speech from Governor Andrew Bailey and January GDP data, though geopolitics and energy prices remain the dominant drivers.

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EUR: Energy exposure weighs on euro

The euro remains vulnerable as higher energy prices threaten the eurozone outlook. Support near 1.1500 in EUR/USD is increasingly fragile.

Even though US-eurozone rate differentials have narrowed in favour of the euro, the region’s exposure to higher imported energy costs is weighing more heavily on the currency.

A large strategic reserve release by the International Energy Agency could produce a short-term rebound. However, gains are likely to struggle beyond the 1.1600 area.

Below the 1.1475 to 1.1500 region, volatility could increase quickly, with the next downside level near 1.1400.

Interestingly, markets are now pricing a more hawkish eurozone rate path as investors expect stronger imported inflation. Rate differentials between the US and eurozone are now the narrowest since 2024, with roughly 50 basis points of tightening priced by the end of 2026.

Data releases are limited this week, although German industrial production and orders disappointed, falling 1.2% year on year in January and weakening expectations for a near-term recovery.

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Looking ahead

• US CPI (Wednesday) and core PCE (Friday) will shape expectations for Federal Reserve policy.

• Potential IEA strategic reserve release could temporarily ease pressure in energy markets.

• Middle East developments remain the dominant driver of oil and FX markets.

• Technical levels: DXY may test 100, while EUR/USD support near 1.1500 remains vulnerable.