Dollar Struggles to Shine Amid Geopolitical Tensions and Oil Spikes.
Fed faces new inflation risks from rising oil prices, limiting chances of rate cuts despite economic slowdown.
Dollar bounce short-lived due to persistent market skepticism and strong USD short positioning.
Oil volatility reshapes euro outlook, capping EUR/USD upside, especially above 1.1600.
Pound shows resilience, maintaining an uptrend above key technical levels despite geopolitical headwinds.
Risk remains skewed to status quo, with central banks cautious and dollar downside buffered by global tensions.
USD: Dollar rebound proving underwhelming
This week was always set to be action-packed for global markets, with several major central bank meetings—especially the Fed’s—meant to clarify policymakers’ thinking on inflation and growth. But geopolitics, particularly in the Middle East, has hijacked the narrative. The ongoing crisis there poses real threats to energy markets, which could, in turn, reshape inflation expectations and central bank strategies.
Our commodities analysts have highlighted that the rising risk premium in oil is warranted, especially with fears that disruptions in the Strait of Hormuz could spike Brent prices toward $120/bbl. Currently hovering below $75, Brent remains volatile.
With oil elevated, central banks are likely to be more cautious about cutting rates. The Fed is expected to hold rates steady on Wednesday, and the current energy market uncertainty gives them political cover to resist pressure from the White House for cuts. We think there’s a chance the Fed lowers its 2025 rate-cut outlook from 50bp to 25bp, which could offer modest upside for the dollar.
Still, a hawkish Fed hasn’t been enough to lift the greenback meaningfully. The dollar’s bounce post-Israel-Iran tensions has mostly fizzled, despite high oil and no regional de-escalation. This reflects a broader market skepticism about the dollar—each attempted rebound has been met with fresh selling.
Even though oil-related inflation might boost yields, they’re not making the USD more attractive. While the dollar’s downside may be limited by geopolitical risks, sharp drops (like DXY below 98.0) are unlikely to persist unless tensions ease.
Also in focus this week: the G7 summit in Canada, which should generate headlines on trade and geopolitics.
EUR: Euro faces ceiling amid energy risks
The eurozone’s energy dependence is capping EUR/USD’s upside potential. Even before the Middle East tensions escalated, we believed levels above 1.1600 were overdone. Our models currently estimate fair value around 1.110, with anything above 1.1640 entering overvalued territory.
This week, the euro will mainly react to oil volatility and USD swings. In Europe, we’re watching the ZEW economic sentiment survey and speeches by ECB policymakers, with both hawkish and dovish voices weighing in today.
Elsewhere in Europe, expect rate cuts from the Riksbank and Swiss National Bank—though Sweden’s decision is less certain due to the oil price surge. Meanwhile, the Bank of England and Norges Bank are expected to stay on hold.
GBP: Sterling stands strong despite global jitters
So far, the Middle East conflict hasn’t significantly dented GBP/USD, which continues to show technical strength. Despite heavy global uncertainty, the pound remains in an upward trend.
Last Friday’s dip to 1.3515 was short-lived; by Monday, the pair had rebounded to 1.3566. Its resilience suggests the broader bullish structure is still intact, even with increased USD demand tied to geopolitical stress.
GBP/USD remains above its nine-day exponential moving average, and brief dips below this level have been swiftly reversed. Our models suggest a move toward 1.36 is likely in the near term, with a possible retest of the 2025 high at 1.3631 later this week.
However, don’t expect fresh highs unless tensions between Israel and Iran ease. A major misstep—like Iran drawing in U.S. forces—could spark a surge in oil and a stronger dollar, dampening the pound’s momentum.