Oil, Policy Divisions, and Central Bank Signals Drive FX Market Uncertainty.

USD – Remains supported, driven less by monetary policy clarity and more by external forces such as surging oil prices and geopolitical tensions. Despite notable dissent within the Federal Reserve, markets are not yet pricing a clear shift in rate direction, leaving the dollar firm but without a decisive policy-driven breakout.

EUR – Holds a relatively balanced but vulnerable position, with strength contingent on ECB rhetoric and external developments. While rate hike expectations persist, slowing growth – particularly in Germany – and reliance on energy market stability limit upside potential.

GBP – Faces a mixed outlook, with rate hike expectations rising alongside energy prices, but tempered by cautious Bank of England guidance. Sterling’s direction will hinge on today’s policy signals, with risks skewed toward a dovish surprise if growth concerns take precedence.

USD:

The dollar strengthened overnight, though the move was driven more by external factors than internal policy conviction. A sharp rise in Brent crude prices above $120 – amid escalating geopolitical tensions and disruptions in the Strait of Hormuz – boosted inflation expectations and supported the currency. This overshadowed a notably divided Federal Reserve decision, which saw the highest number of dissents since 1992. While one member voted for a rate cut and three opposed the easing bias, markets continue to expect no immediate changes in policy direction.

Additional pressure on risk sentiment came from underwhelming corporate earnings, contributing to declines in risk-sensitive currencies such as AUD and NZD. Looking ahead, attention turns to key U.S. data releases, including core PCE inflation (expected to rise to 3.2% y/y) and Q1 GDP growth (forecast at a solid 2.3% annualised), which may provide further direction for the dollar.

GBP:

Sterling enters today’s Bank of England meeting with shifting expectations. Interest rate markets have increased bets on future tightening, now pricing in up to three rate hikes in 2026, largely in response to rising energy prices. However, the probability of any immediate move remains low.

The focus will instead be on the vote split and forward guidance. Current expectations suggest an 8-1 vote to hold rates steady. Governor Bailey has recently pushed back against aggressive tightening expectations, raising the possibility of a more dovish tone if policymakers prioritise growth risks over inflation concerns. As such, sterling may struggle to gain traction unless the Bank delivers a more hawkish signal than anticipated.

EUR:

The euro’s outlook is closely tied to developments from the ECB meeting and broader energy market dynamics. With Brent crude reaching multi-year highs and growth forecasts – particularly in Germany – being revised lower, the central bank faces a challenging balancing act.

Markets are currently pricing in around three rate hikes this year, but policymakers may opt for a cautious approach, awaiting further clarity on geopolitical risks and energy supply disruptions. The ongoing situation in the Gulf, especially shipping constraints, remains a key external driver. Unless the ECB strongly validates tightening expectations, the euro may remain range-bound, with limited upside in the near term.

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