USD: Cross currents keep the dollar range-bound

Renewed trade uncertainty is weighing on the dollar, while rising US–Iran tensions and firmer oil prices are providing offsetting support. With neither theme in control, price action remains erratic and confined to ranges.

The US Supreme Court ruling on IEEPA tariffs, followed by the introduction of a 10 percent replacement levy, has revived longer-term bearish arguments centred on fiscal sustainability and reserve diversification. However, absent clearer evidence of a US cyclical slowdown, this is unlikely to trigger a sustained depreciation.

Geopolitics remain pivotal. Oil retreated after reports suggested Hezbollah would not respond to limited US strikes on Iran, easing immediate fears of regional escalation. Both WTI and Brent briefly moved lower, underlining how sensitive energy markets are to shifts in rhetoric. While President Donald Trump reiterated a preference for diplomacy, headline risk remains elevated.

Recent price action also points to a gradual erosion in the dollar’s traditional safe-haven appeal. A muted reaction to strong Nvidia earnings reflected scepticism around AI-driven equity gains, and the softer tone in the dollar during periods of risk aversion suggests investors are less inclined to seek shelter in US assets.

Stronger equities, supported by Nvidia’s results, have encouraged demand for higher-beta currencies. Oil price stabilisation has further reduced the need for defensive positioning. Polymarket continues to price the probability of a US strike on Iran at around 60 percent by end-March, a level that has become a key barometer for crude.

Today’s US jobless claims are unlikely to shift the narrative materially. Initial claims are seen edging up to 216k, with continuing claims slightly lower. We look for near-term consolidation, though the balance of risks still favours gradual softness into the second half of the year on expectations of slower US growth and Fed easing. We do not anticipate a repeat of the sharp 2025 decline, but political and fiscal uncertainty into the midterms keeps the medium-term bias negative.

EUR: Fiscal impulse offers structural support

ECB President Christine Lagarde speaks before the European Parliament’s ECON Committee today. While she has emphasised policy flexibility, markets continue to price broadly stable rates through 2026. Upcoming CPI data are unlikely to alter that assessment materially.

Short-term rate differentials remain a headwind for EUR/USD, and we see 1.1750 as an important support level barring a material escalation in Iran. Technically, the pair has held its 50-day moving average, though momentum indicators suggest the recent advance is losing traction.

The broader backdrop is gradually improving. The euro area’s €800 billion fiscal package, including Germany’s €500 billion contribution, is beginning to feed through. Germany’s Ifo index rose to 88.6 in February, the strongest reading since last summer, with gains in both current conditions and expectations.

Increased defence and infrastructure spending is starting to lift order books and reduce inventories, helping stabilise Germany’s industrial base. Coupled with signs that the period of pronounced US outperformance may be fading, there is scope for continued portfolio diversification away from the dollar. We retain a year-end target near 1.22, though near-term risks include firmer oil and a more cautious Fed easing profile.

GBP: Political risk meets resilient price action

Sterling outperformed in quiet trade, supported by a record high in the FTSE 100 following strong HSBC results. Banks and traditional sectors such as mining are attracting renewed interest as technology valuations face closer scrutiny.

The UK’s institutional framework also compares favourably at a time when central bank independence is being questioned elsewhere. Barring a significant negative surprise from today’s by-election, this backdrop should provide a degree of underlying support.

The February Bank of England meeting struck a dovish tone, with policymakers anticipating a sharp mechanical fall in headline inflation. Market pricing for a March rate cut has eased from 86 percent to around 73 percent. With no additional inflation data before the next meeting, guidance will be closely parsed. Inflation remains elevated and the outlook for oil, relevant for a net energy importer, is less benign than previously assumed.

Technically, GBP/USD continues to find support near its 200-day moving average at 1.3448, while GBP/EUR has reclaimed its 100-day moving average. We would require a decisive break below 1.3331 in GBP/USD or 1.1368 in GBP/EUR to signal a more durable downturn. The by-election represents an event risk, with options markets reflecting elevated hedging demand against sterling weakness.

JPY: Policy noise versus underlying normalisation

The yen has weakened following reports of Prime Minister Sanae Takaichi’s reservations over further tightening and the appointment of Ayano Sato and Toichiro Asada to the Bank of Japan’s board, both seen as dovish.

We do not view these changes as sufficient to derail the gradual normalisation process. One outgoing member had been consistently dovish, and the overall balance within the board may not shift meaningfully. Economic data should remain the primary driver. While political pressure on the central bank is a risk, any perception of lost independence would carry costs for the government.

Our baseline remains a June rate increase to 1.0 percent. Market pricing has fluctuated but has returned to close to fully pricing a June move following hawkish remarks overnight.

In the near term, the yen remains vulnerable to improved global risk sentiment and positioning dynamics. A softer Tokyo core CPI reading, expected at 1.6 percent, may encourage renewed dovish speculation. USD/JPY could retest the 157.7 high from 9 February, with intervention risks likely to intensify above that level. We suspect authorities would be more inclined to act closer to 160.

Looking ahead

• US jobless claims

• ECB President Lagarde at the ECON Committee

• Tokyo CPI data

• UK by-election results

• Developments in US–Iran tensions and oil markets