USD: Dollar holds firm as geopolitics dominate

Markets remain focused on the Middle East conflict, where even tentative diplomatic signals have briefly interrupted recent price trends. A report suggesting Iran had indirectly contacted US officials to discuss ending hostilities, later denied, helped oil ease and equities recover earlier this week. Comments from President Trump about guaranteeing safe passage for Middle Eastern oil shipments through insurance arrangements and naval escorts also supported sentiment.

Despite this, the Strait of Hormuz remains heavily constrained. The operational risks surrounding shipping remain high, and any US-backed insurance or escort system would take time to establish. As a result, the longer the disruption persists, the greater the economic risk to global energy supply chains.

The dollar surrendered part of its weekly gains yesterday after reaching levels last seen in November, but demand returned during the Asian session, leaving the DXY close to 99. The 100-day moving average near 98.56 may offer near-term support once volatility eases.

US data continues to reinforce the underlying macro backdrop. Private sector employment rose by 63k in the latest ADP release, beating expectations, while the ISM services index climbed to 56.1, the strongest reading since mid-2022. The figures highlight continued momentum in the services sector.

Energy markets remain under strain. Crude oil is holding near $84–85 per barrel, European natural gas has jumped roughly 10% in early trading, and China has instructed domestic refiners to halt exports of diesel and gasoline following disruptions to crude deliveries. If tensions persist, the dollar is likely to remain supported by safe-haven demand and global liquidity flows.

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GBP: Energy shock keeps sterling cautious

Sterling is trading carefully as the surge in global energy prices and geopolitical uncertainty weigh on sentiment. The latest jump in oil and gas prices has revived petro-dollar dynamics, briefly pushing GBP/USD below 1.33 earlier this week, the weakest level since December.

The UK’s vulnerability stems from its position as a net energy importer. While higher oil prices are uncomfortable, the sharp rise in natural gas prices poses a more direct threat. Wholesale gas prices have more than doubled since the weekend, recording their largest two-day rise on record. Although still far below the extremes seen during the early phase of the Ukraine war, the speed of the move highlights the UK’s exposure.

This represents a deterioration in the UK’s terms of trade, a dynamic that weighed heavily on sterling during 2022. While the current environment is not directly comparable, it remains a key risk for the currency.

At the same time, sterling has shown some resilience. Markets are reassessing expectations for Bank of England easing as higher energy prices threaten to keep inflation elevated. The probability of a March rate cut has fallen sharply, pushing gilt yields higher and offering intermittent support for the pound.

Sterling remains relatively steady against the euro near 1.15, but the stronger dollar continues to weigh on GBP/USD as investors favour liquidity and safety.

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EUR: ECB signals patience as euro stabilises

EUR/USD has stabilised around 1.16 after falling roughly 1.7% this week and briefly touching levels near 1.1530. Buying interest has emerged around these levels as markets reassess the outlook.

ECB officials have struck a cautious tone when discussing the possible impact of the Middle East conflict. Governing Council member Olli Rehn stressed the need for patience before revising economic projections, while Bank of France Governor François Villeroy de Galhau said there is currently no case for raising rates.

For now, policymakers appear reluctant to assume a conflict-driven shock to the euro area outlook. Some of the inflation impact from higher energy prices could also be offset by the stronger euro.

Trade developments are also in focus. The EU has reportedly received assurances that the current US tariff rate of 10% will not immediately rise to 15%, although the increase remains under consideration. Because the baseline tariff is applied on top of existing duties, some EU exports could still face effective tariffs above 15%.

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Looking ahead

• Middle East developments remain the key driver for FX and risk assets

• Oil and gas prices will be closely watched for signs of further supply disruption

• Conditions in the Strait of Hormuz remain critical for global energy flows

• Continued resilience in US data could reinforce dollar support

• Markets will monitor changes in Fed and Bank of England rate expectations

• Equity market stability remains important for sterling and broader risk sentiment