USD: Dollar benefits from energy shock dynamics

The US dollar has emerged as the clearest macro beneficiary, posting its strongest two-day rally in nearly a year. It has outperformed traditional havens such as gold and Treasuries as investors seek liquidity, safety and relative economic resilience.

The US’s status as a net energy exporter provides a clear terms-of-trade advantage over Europe and much of Asia. This aligns with the historical pattern seen during supply-driven oil shocks, when higher energy prices caused by supply disruption tend to support the dollar. The early phase of Russia’s invasion of Ukraine offers a useful comparison. Brent crude rose more than 30% and the dollar ultimately strengthened by over 15% as markets absorbed the growth and inflation implications.

Current conditions show a similar structure. The Federal Reserve remains the most dovishly priced G10 central bank, yet the US economy appears better placed than energy-importing peers to absorb higher oil prices. That combination leaves scope for further dollar gains if the conflict persists or broadens.

Markets are now watching whether shipping lanes remain secure and whether disruption across the Gulf intensifies. Energy prices remain the key near-term driver. Risk assets briefly stabilised after President Trump suggested naval convoy protection for shipping in the Strait of Hormuz and potential insurance support for fleets, although markets will want confirmation before adjusting positioning.

Central bank expectations also remain important. The inflation implications of higher energy prices have pushed the front end of yield curves higher, a trend that remains broadly supportive for the dollar. Today’s US data may reinforce that theme. A solid ADP employment print near +50k would suggest labour market risks are easing, while the ISM services prices component and the Fed’s Beige Book may shape expectations ahead of the 18 March FOMC meeting. Markets currently price roughly 45bp of Fed easing this year.

DXY briefly reached 99.68 yesterday. While investors may hesitate to chase the index through the 100.00 to 100.35 range seen over the past eight months, a clearer improvement in the energy outlook would likely be required before markets rebuild meaningful short dollar positions.

GBP: Sterling pressured by geopolitical and fiscal concerns

Sterling extended its decline yesterday as tensions in the Middle East continued to support a broader risk-off tone.

Domestically, the Spring Budget delivered updated forecasts from the Office for Budget Responsibility but no major policy changes. The OBR now expects UK growth of 1.1% in 2026, down from 1.4% previously, while forecasts for 2027 and 2028 were revised slightly higher to 1.6%. Projections for 2029 and 2030 remain unchanged at 1.5%.

The bigger concern for markets is the potential economic impact of higher energy prices if the conflict persists. Elevated oil prices could weigh on UK growth while simultaneously lifting inflation. That combination would pressure public finances through weaker tax revenues and higher borrowing costs.

The fiscal headroom announced yesterday, estimated at £23.6bn compared with £21.7bn in November, may therefore prove less meaningful given it was calculated before the latest escalation in the Gulf. Fiscal slippage remains a concern, particularly given existing political uncertainty.

These dynamics reinforce pressure on both gilts and sterling. Even if the Bank of England adopts a slightly more hawkish stance in response to higher inflation risks, the domestic backdrop may limit sustained GBP support. Markets have already adjusted expectations, scaling back projected BoE easing by December from more than two 25bp cuts to roughly one.

EUR: Energy volatility revives terms-of-trade concerns

The euro is once again facing the pressure of an energy-driven terms-of-trade shock, echoing the early phase of Russia’s invasion of Ukraine. While the magnitude is smaller so far, the market pattern is similar: gas prices higher and EUR/USD lower.

European natural gas volatility has surged. Front-month Dutch TTF futures have risen more than 80% since Friday and 30-day realised volatility is approaching levels last seen during the 2022 energy crisis. The halt at Qatar’s LNG facility has heightened fears of broader supply disruption just as Europe enters the gas storage refill season.

This environment directly weighs on the euro. A supply-driven energy shock represents a particularly negative scenario for Europe, which must absorb higher import costs while the US benefits from its position as a net energy exporter.

Recent inflation data adds another layer of complexity. Euro area CPI surprised to the upside in February, with headline inflation rising to 1.9% while core and services inflation also accelerated. German two-year yields moved higher as markets partially rebuilt expectations for ECB tightening later in the cycle.

Positioning has also amplified the move. Long euro exposure, particularly among asset managers, left EUR/USD vulnerable to rapid adjustment, with the pair briefly falling to 1.1530.

In the near term, the duration of the energy shock will be critical. If disruption persists, EUR/USD could move towards the 1.10 to 1.12 area. Our base case assumes tensions ease gradually and shipping through the Strait of Hormuz resumes, which could allow the pair to stabilise around 1.1550 to 1.1575.

Looking ahead

• US ADP employment report for signals on labour market resilience

• ISM services survey, particularly the prices paid component

• Federal Reserve Beige Book ahead of the 18 March FOMC meeting

• Developments around shipping security in the Strait of Hormuz

• Energy market volatility and European gas prices

• Ongoing repricing of rate expectations across major central banks