FX Outlook: Dollar Driven by Oil & Geopolitics, Sterling Lags, Euro Steady.

USD – Remains strong, supported by rising oil and geopolitical tensions, though volatility is elevated given Middle East developments.

EUR – Slightly softer near-term as energy prices rise, but relatively stable with focus on upcoming inflation data and rate expectations.

GBP – The weaker link for now: pressured despite higher yields, with oil and external factors driving moves more than domestic data.

USD:

The dollar enters the week in a strong position, with the dollar index up over 1% since last Monday as oil prices remain elevated and geopolitical tensions intensify. Despite talk of a potential deal, the situation in the Middle East continues to escalate — with Houthi involvement, increased US troop deployment, and renewed rhetoric around Iranian oil.

Markets face a difficult backdrop, with geopolitics firmly in control. USD/JPY is a key pair to watch after briefly breaking above 160 before reversing sharply on warnings of potential Japanese intervention.

Focus today is on Fed speakers Powell and Williams, while Friday’s non-farm payrolls report (expected +60K vs. -92K prior) is the key data highlight this week.

EUR:

The euro is trading on a slightly softer footing as oil and gas prices continue to grind higher, weighing on sentiment. Attention now turns to inflation data across the region, which will be key in shaping expectations for near-term rate moves.

German CPI is due this afternoon, followed by France and the eurozone-wide release tomorrow. Headline inflation is expected to tick higher, driven by energy, while core inflation is likely to remain steady.

In this environment, the euro may remain relatively stable but sensitive to both energy prices and broader risk sentiment.

GBP:

Sterling weakened into the end of last week, despite UK yields pushing higher, with the 10-year gilt breaking back above 5.00%.

It’s a quiet week for UK data, with the main release being tomorrow’s final Q4 GDP estimate. However, GBP is likely to be driven less by domestic fundamentals and more by external factors — particularly oil price movements and developments in the Strait of Hormuz.

Without a clear domestic catalyst, sterling may continue to lag its peers in the near term.

Economic Calendar