USD: Oil Shock Reasserts Dollar Demand

The United States and Israel carried out coordinated strikes on Iran over the weekend in one of the most consequential assaults on Iranian territory in decades. Military installations and senior leadership sites were targeted, with reports confirming the death of Supreme Leader Ayatollah Ali Khamenei. Tehran has responded with attacks on Israeli cities and US bases across the region, and exchanges continue.

Tensions had escalated rapidly this year. Washington had built its largest regional military presence since 2003, while negotiations over Iran’s nuclear programme broke down, removing the diplomatic option. President Donald Trump has indicated operations could persist for several weeks, underscoring the risk of a protracted confrontation.

Energy markets reacted immediately. Brent Crude rose sharply towards USD 79 per barrel, extending its year to date advance. Traffic through the Strait of Hormuz has effectively paused, disrupting a critical artery for global oil and LNG flows. Although OPEC signalled a production increase from April, near term supply constraints dominate price action.

For FX, an energy driven geopolitical shock typically favours the dollar. The US Dollar Index advanced at the Asia open. Structural factors reinforce this move: the US is a net energy exporter and most oil trade is denominated in USD. In addition, broad based deleveraging during risk off episodes generates automatic demand for dollars through global funding channels. We retain a constructive bias on the USD while energy disruption persists

GBP: Domestic Fragilities Exposed

Sterling began the week under pressure, reflecting both global risk aversion and a softer domestic backdrop. GBP/USD fell close to 1% at the open, extending February’s decline and ending a three month run of gains.

The pound continues to behave as a high beta G10 currency during episodes of market stress. Higher oil prices present an additional challenge for the UK, given the inflationary implications for households and the potential constraint on further easing from the Bank of England.

Political uncertainty has resurfaced following Labour’s by election setback in Gorton and Denton, prompting renewed discussion of a UK specific risk premium. GBP/EUR has retreated towards 1.14, with former support levels now acting as resistance and momentum deteriorating.

Sterling has underperformed across the G10 complex, suggesting domestic headwinds are compounding external pressures. Without clearer political direction or a stabilisation in energy markets, rebounds may prove shallow

EUR: Terms of Trade Deterioration Weighs

EUR/USD opened on the back foot after slipping below 1.18, a level that had capped rallies for much of the past quarter. The earlier topside break has faded as the macro backdrop turned less supportive.

The euro area’s status as a net energy importer leaves it exposed to higher crude prices. The renewed surge in oil represents a negative terms of trade shock and clouds the bloc’s growth outlook. Any incremental safe haven characteristics the euro had accumulated have receded in the face of a classic dollar positive risk event.

This week’s US data, including labour market and retail sales releases, are unlikely to offset the geopolitical driver. Even softer prints may struggle to generate sustained EUR/USD upside given the dominance of energy and risk sentiment. Attention also turns to February CPI, expected to hold steady near 1.7% following contained national readings.

Absent a clear de escalation narrative, rallies in EUR/USD are likely to prove corrective.

Looking ahead

• Developments in the US Israel Iran conflict and any signs of diplomatic engagement

• Brent price action and shipping flows through the Strait of Hormuz

• US labour market and retail sales data

• Euro area February CPI

• UK Spring Statement and guidance from the Bank of England

• Broader risk sentiment and funding market conditions