Dollar Surges on Safe-Haven Demand, Euro Weighed by Energy Shock, Sterling Mixed on Policy Repricing.
USD – The dollar is rallying on safe-haven demand, rising oil-driven inflation expectations, and reduced expectations for Fed rate cuts.
EUR – The euro is weakening as energy price shocks and geopolitical risks hit growth expectations, with ECB hawkishness unable to offset strong USD flows.
GBP – Sterling is supported by shifting BoE rate expectations but remains pressured against the dollar amid global risk aversion and a challenging UK growth-inflation outlook.
USD:
The US dollar is gaining strong upward momentum, driven primarily by a sharp increase in global risk aversion. Escalating conflict in the Middle East has triggered a broad flight to safety, with investors rotating into the dollar as a traditional safe-haven asset. A major additional driver is the surge in oil prices, which is feeding directly into inflation expectations. Energy markets have tightened significantly amid fears of supply disruption, with crude prices rising sharply and adding to concerns about a prolonged inflation shock. This environment is also leading to a repricing of Federal Reserve policy expectations. Markets are increasingly scaling back expectations for rate cuts in 2026, as the inflationary impact of higher energy prices complicates the Fed’s ability to ease policy.
EUR:
Escalating geopolitical tensions and the associated surge in oil prices are disproportionately impacting the eurozone, given its reliance on imported energy. This has weakened investor confidence in the region’s near-term growth outlook and pushed EUR/USD lower as capital flows favour the dollar. From a policy perspective, the European Central Bank is maintaining a cautious but increasingly hawkish bias. While rates have been held steady for now, markets are beginning to price in the possibility of future rate hikes rather than cuts, as policymakers respond to inflation risks stemming from energy markets. However, this has not been enough to offset euro weakness, as the market remains more focused on relative US strength and safe-haven flows.
GBP:
A key theme underpinning sterling is the repricing of Bank of England policy expectations. Markets are increasingly moving away from rate cut expectations and instead considering the possibility of further tightening or prolonged higher rates, as inflation risks rise due to the energy shock. This shift has helped support UK yields and provided some backing for the pound, particularly versus European peers. the pound remains under pressure against the US dollar, as global risk aversion continues to dominate FX markets. Escalating geopolitical tensions and a sharp rise in oil prices have driven flows into the dollar as a safe haven, limiting GBP/USD upside and keeping the pair near recent lows. From a macro perspective, the UK faces a challenging growth-inflation backdrop. Rising energy costs are expected to push inflation higher while simultaneously weakening consumer demand and growth prospects, creating a difficult environment for policymakers and weighing on longer-term sterling sentiment.