USD: Dollar supported as energy disruption sustains risk demand

FX markets remain cautious, with few traders willing to carry short dollar exposure into the weekend given geopolitical uncertainty. Shipping disruption in the Strait of Hormuz continues to constrain supply, keeping pressure on crude and gas prices.

Policymakers are exploring ways to ease the shock. The United States Department of the Treasury has introduced a temporary 30-day waiver allowing India to continue purchasing seaborne Russian crude. Markets are also watching for additional steps, including potential intervention in oil futures or a release from the Strategic Petroleum Reserve.

Another proposal under discussion is a temporary suspension of federal fuel duties. Lower petrol prices could soften inflation and provide scope for the Federal Reserve System to cut rates, though the fiscal impact could push longer-dated Treasury yields higher.

Away from energy, attention turns to US data. January non-farm payrolls are expected to rise by around 55k following the previous 130k reading, though severe winter weather could produce a weaker figure. Any dollar weakness may prove brief given the geopolitical backdrop.

Comments from Christopher Waller will also be watched for signals on the Fed’s policy stance. For now, the US Dollar Index is likely to hold within a 98.50 to 99.50 range.

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GBP: Sterling supported by yields but risk sensitivity remains

Sterling has outperformed the euro this week despite the UK sharing many of Europe’s energy challenges. GBP/EUR has moved above €1.15, approaching a one-month high and on track for its strongest weekly gain since April 2025.

The move has been driven largely by rising gilt yields. Markets have reduced expectations for easing from the Bank of England, with investors now pricing only one rate cut in 2026 and some economists expecting none.

While higher yields offer near-term support, the macro backdrop remains fragile. Persistently high energy prices could push the UK economy towards a stagflationary mix of weaker growth and elevated inflation.

Technically, momentum has improved after the pair moved above its 50-day moving average. However, sterling remains vulnerable if higher energy prices trigger a broader risk-off move in global markets.

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EUR: Energy shock keeps euro under pressure

The euro has weakened this week as the Middle East conflict pushes energy prices sharply higher. EUR/USD has fallen around 2% as oil prices surged and European gas prices briefly doubled.

Europe’s heavy reliance on imported energy leaves the region particularly exposed. Higher costs squeeze real incomes, weigh on growth and complicate the inflation outlook, echoing dynamics seen during the 2022 energy crisis.

Interest rate markets have also adjusted. One-year-forward EUR OIS rates have risen by roughly 32bp, narrowing two-year EUR-US swap spreads to around 95bp, among the tightest levels since late 2024. This repricing offers some support for EUR/USD around the 1.1500 to 1.1530 area.

However, unless energy prices retreat, rallies in the euro are likely to remain limited. Markets will also watch German factory orders for early signs that fiscal stimulus is feeding into activity.

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Looking ahead

• US non-farm payrolls and retail sales

• Remarks from Federal Reserve officials, including Christopher Waller

• Developments in shipping through the Strait of Hormuz

• Possible US policy measures targeting energy markets

• German factory orders data

• Oil and Dutch TTF gas prices as key drivers for FX markets