Dollar Strength Driven by Geopolitics and Rates, Euro Pressured, Sterling Mixed on Policy Shifts.

USD – The dollar is being supported by geopolitical-driven safe-haven demand, rising oil-induced inflation, and a stronger “higher for longer” Fed rate outlook.

EUR – The euro remains under pressure due to the ECB’s policy constraints and ongoing USD strength driven by risk-off sentiment and energy market dynamics.

GBP – Sterling is relatively resilient on crosses due to shifting BoE expectations but remains pressured against the dollar amid global risk aversion and strong USD flows.

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USD:

Ongoing geopolitical tensions in the Middle East are keeping markets in a defensive stance, with investors favouring the dollar as uncertainty persists and risk appetite remains fragile. Recent headlines suggest that any fading hopes of de-escalation are quickly reversing into renewed USD strength, highlighting how sensitive the currency is to geopolitical developments. A key underlying driver is the surge in oil prices and the resulting inflation shock. Disruptions to energy supply routes, particularly around the Strait of Hormuz, have pushed crude prices sharply higher, reinforcing global inflation concerns. Markets are also continuing to reprice Federal Reserve expectations, with investors scaling back rate cut bets significantly. The probability of easing has dropped materially compared to earlier in the year, as persistent inflation risks linked to energy prices make it more difficult for the Fed to pivot dovishly. The higher for longer interest rate narrative remains a major pillar of USD support.

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EUR:

The European Central Bank remains in a difficult position. While inflation risks—particularly from energy—could justify a more hawkish stance, weakening growth dynamics are limiting the ECB’s ability to tighten aggressively. This “policy dilemma” is contributing to subdued euro sentiment, as markets see less scope for decisive action compared to the Federal Reserve. The euro remains under sustained pressure, with EUR/USD trading close to recent lows as broader market conditions continue to favour the US dollar. Persistent geopolitical tensions and elevated energy prices are maintaining a risk-off backdrop, which is drawing capital away from the euro and into the dollar. This dynamic has kept the single currency on the defensive, with limited signs of a near-term reversal.

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GBP:

Sterling is trading with a soft but relatively resilient tone, underperforming against the US dollar while holding steadier versus the euro. GBP/USD remains under pressure near recent lows as strong USD demand dominates, but GBP/EUR has shown relative stability as eurozone-specific headwinds persist. A key driver for the pound is the ongoing repricing of Bank of England expectations. Markets are increasingly moving away from earlier rate cut expectations and are now considering the possibility of prolonged higher rates or even further tightening, as rising energy prices feed into inflation risks. This shift has supported UK yields and provided some underlying support for sterling, particularly on the crosses. However, the pound continues to face significant external headwinds, particularly from global risk sentiment. Heightened geopolitical tensions and elevated oil prices are driving safe-haven flows into the US dollar, limiting GBP/USD upside and keeping sterling vulnerable during periods of risk aversion.

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