USD: Energy shock reinforces dollar bid

The US dollar began the week firmly on the front foot, posting its strongest daily gain since July 2025 with a rise of around 1%. The abrupt shift from diplomatic progress to a broad and highly visible campaign targeting Iran’s leadership has left markets scrambling to reprice geopolitical risk.

This is no longer a contained episode. The scale and ambiguity of the strategic endgame have widened the distribution of outcomes and driven a decisive move into dollar liquidity. US equities opened weaker but recovered through the session, with the S&P 500 serving once again as the clearest barometer of underlying sentiment.

Energy markets sit at the centre of the macro narrative. Disruption has extended beyond shipping routes to physical supply. Israel has halted output at key offshore fields, while Qatar’s LNG exports have been severely curtailed following drone strikes. European gas prices have surged more than 50%, and oil flows through the Strait of Hormuz remain exposed.

Crucially, the historical relationship between oil and the dollar has shifted. The USD now tends to strengthen alongside higher crude prices, amplifying the shock for net importers. The US, with limited net oil import exposure relative to GDP, is comparatively insulated. By contrast, major Asian and European economies face deteriorating terms of trade.

In the current environment, macro data such as payrolls risk being sidelined. The dominant driver is conflict duration and its impact on energy supply. For now, the bid for safety and liquidity favours the dollar.

GBP: Sentiment swings and fiscal sensitivity

Sterling remains tightly linked to global risk appetite. GBP/EUR fell to 1.1379 before rebounding to 1.1472, a recovery driven less by domestic factors and more by stabilising equity markets. The absence of fresh UK data has left the pound trading as a proxy for broader sentiment.

The more pressing issue is energy. UK natural gas prices have climbed to levels last seen after Russia’s invasion of Ukraine, reflecting the disruption to Qatari LNG supply. The risk is clear: a sustained period of elevated wholesale prices would feed into household bills, compress real incomes and strain public finances.

This presents an awkward backdrop for Chancellor Rachel Reeves’ spring statement. While no major fiscal changes are expected, the deterioration in the external environment complicates the outlook. A renewed inflation impulse would also restrict the Bank of England’s flexibility on rate cuts.

Technically, GBP/USD has broken below a cluster of moving averages and trades at its weakest level since December. Momentum indicators suggest scope for further downside, with the 100 week moving average near 1.3080 a potential magnet should energy prices extend their rise.

Sterling’s resilience will depend less on domestic rhetoric and more on whether markets conclude that the conflict remains contained. A prolonged energy shock would leave the currency exposed.

EUR: Energy vulnerability and positioning unwind

The euro traded softer against the dollar and Canadian dollar, reflecting the eurozone’s direct exposure to higher energy costs. As a net importer, the bloc faces deteriorating trade dynamics when oil and gas prices spike.

EUR/USD briefly slipped below its 100 day moving average near 1.1700 and is now approaching the 200 day level around 1.1670. A sustained break would open the way towards the mid January lows near 1.1570.

Within Europe, the single currency outperformed several high yield CEE peers. Those currencies had attracted sizeable carry inflows in a low volatility backdrop and are now vulnerable to sharper reversals as positions unwind.

EUR/CHF also drew attention. The euro strengthened against the franc after firmer intervention signals from the Swiss National Bank dampened safe haven flows. Policymakers appear alert to the risk that further franc strength could push inflation below zero.

Eurozone inflation is expected at 1.7% for February. While higher energy prices pose upside risks, it is too early for this to alter medium term projections. For now, euro performance remains closely tied to the trajectory of gas markets and dollar demand.

Looking ahead

• Equity market direction as a proxy for broader risk appetite

• Developments in Middle East hostilities and any diplomatic progress

• Stability of LNG flows and European gas pricing

• Commentary from the Bank of England and the ECB on energy pass through

• Key technical levels in EUR/USD and GBP/USD

• US data releases, though likely secondary to geopolitical headlines