FX Market Update: Dollar Strength Persists as Energy Prices and Central Banks Take Focus.

USD – Remains strong, supported by safe-haven demand and rising energy prices as geopolitical tensions persist. However, direction from here will depend heavily on central bank guidance this week.

EUR – Is currently under pressure, with the euro trading near yearly lows as higher oil and gas prices highlight the eurozone’s vulnerability as a major energy importer.

GBP – Faces a delicate balancing act, with a weakening domestic economy colliding with rising energy prices and uncertainty around the next move from policymakers.

---

USD:

The dollar index remains firm this morning, having gained around 2.7% since the start of the month and touching a four-month high on Friday. Ongoing geopolitical tensions continue to drive safe-haven demand, with headlines referencing drone damage to Dubai airport and renewed concerns around the Strait of Hormuz.

With Brent crude trading around $105 per barrel, energy markets remain a key driver of dollar strength. This week also brings the first major round of central bank decisions since the conflict escalated, including several across the G10. Markets have sharply repriced rate expectations, with anticipated cuts from the Federal Reserve roughly halved while some European central banks are now expected to consider hikes this year. Policymakers are likely to adopt a more hawkish tone but keep flexibility as the geopolitical situation evolves.

---

EUR:

The euro fell to a four-month low on Friday and is trading close to its weakest levels of the year. The upcoming decision from the European Central Bank will be the main focus for markets, though it may be difficult for policymakers to shift the current trend.

Much of the euro’s weakness is being driven by the sharp rise in oil and gas prices, which tends to weigh on the eurozone given its reliance on imported energy. As a result, movements in energy markets and geopolitical developments in the Middle East are likely to remain the dominant drivers for the currency in the near term. A sustained recovery for the euro may require meaningful progress toward de-escalation in the region.

---

GBP:

Attention for sterling is firmly on Thursday’s policy decision from the Bank of England, with markets closely watching how policymakers balance slowing economic momentum against rising energy costs.

Recent data showed UK GDP flat at 0.0% month-on-month, while wage growth is expected to ease to 3.9%, both pointing to softer domestic conditions. At the same time, higher energy prices are expected to push fuel costs higher in the coming months, complicating the policy outlook.

Rate expectations have shifted dramatically in recent weeks, with a cut that was previously priced at an 85% probability now falling to around 1%. As a result, the pound’s direction will likely depend less on the decision itself and more on the tone of the statement and the vote split among policymakers.

Economic Calendar