Dollar Gains on Energy Shock as Geopolitical Risk Drives Volatility.

USD – Remains firm, supported by rising geopolitical risk and energy market disruption, with inflation concerns tempering rate-cut expectations.

EUR – Under pressure after dipping to a three-month low, though stabilising as markets assess the extent of the energy shock.

GBP – Attempting a modest rebound, but still weaker on the week amid geopolitical strain and rate sensitivity.

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USD:

The dollar made further gains yesterday as volatility picked up and energy prices continued to rise amid a halt to LNG production in Qatar and disruption to oil transit through the Strait of Hormuz. President Trump’s offer to escort and insure ships through the Strait helped calm nerves briefly but ultimately had limited market impact.

The key driver remains the extent and duration of supply disruptions in the energy market — the worse the situation becomes, the greater the potential upside for the dollar through safe-haven demand and inflation hedging. Concerns around the inflationary impact of the conflict have broadly reduced expectations for central bank rate cuts this year, with two rate cuts no longer fully priced for the Federal Reserve as of this morning.

Today’s focus turns to US macroeconomic data, including the ADP Employment Change figure and the ISM Services Index for February, where consensus expects a modest dip in the index to 53.5.

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EUR:

The euro dipped further yesterday, briefly hitting a three-month low before stabilising this morning. While the eurozone releases PPI inflation and unemployment data today, the Iran conflict and energy market developments are likely to remain the dominant drivers for now.

EURUSD may find a near-term floor if tensions do not escalate further. However, as seen in 2022, the single currency can be particularly vulnerable to a terms-of-trade shock given the region’s exposure to energy imports. Without a meaningful improvement in the geopolitical backdrop, upside may remain limited.

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GBP:

Sterling has recovered around 0.7% from yesterday’s low but remains approximately 1% weaker on the week. The Spring Statement proved largely a non-event, which arguably supported UK assets given that the FTSE 100 had already fallen nearly 3% and 10-year gilt yields have risen 27bps since Friday.

The UK-US relationship has faced some strain, with President Trump expressing disappointment at Prime Minister Keir Starmer’s refusal to allow UK bases to be used for the initial Iran strikes, and remarking that Starmer was “not Winston Churchill.” While domestic fiscal developments provided limited downside pressure, geopolitical sensitivity and rate expectations continue to cap sterling’s upside.

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