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GBP - Policy expectations shift as Sterling supported by rising UK yields
Sterling began the week with modest support against the Dollar, with GBP/USD trading around $1.3255 during early European hours, largely reflecting a softer Dollar ahead of a pivotal week for central banks. Both the Federal Reserve and the Bank of England are due to deliver policy decisions, leaving currency markets cautious and positioning relatively contained.
Markets are pricing in a pause from the Federal Reserve, with the benchmark rate expected to remain within the 3.50%–3.75% range at Wednesday’s meeting. Persistent inflation pressures have already pushed expectations for the next US rate cut further out, with September now widely viewed as the earliest realistic window.
In the UK, attention turns to Thursday’s Bank of England decision, where policymakers are also expected to hold rates at 3.75%. However, the broader macro backdrop has become more complex. Elevated energy prices and geopolitical uncertainty are reinforcing stagflation risks, creating a policy dilemma for central banks balancing inflation containment with slowing growth.
GBP/EUR moved back toward €1.1580 heading into the weekly close, again struggling to break convincingly above the €1.1600 resistance level despite continued support from rising UK government bond yields.
Sterling’s resilience against the Euro reflects a notable repricing of UK interest rate expectations. Earlier this year, markets had been anticipating rate cuts into 2026. That view has shifted materially, with futures markets now assigning roughly a 50% probability of a UK rate hike before year-end.
The adjustment has been driven in part by renewed volatility in global bond markets. UK 10-year gilt yields have climbed toward 4.7%, approaching five-month highs, reinforcing yield support for the Pound in the near term.
However, markets remain alert to a key risk: if elevated energy costs begin to weigh more visibly on UK growth, concerns around fiscal sustainability and government borrowing could quickly alter sentiment. In that environment, the possibility of stagflation becoming a defining macro theme would have important implications for Sterling positioning.
Weekly Data:
19th March
7am - Claimant Count Change & Average Earnings Index 3m/y
12pm - Monetary Policy Summary, MPC Official Bank Rate Votes & Official Bank Rate
EUR - Energy price sensitivity keeps ECB policy in focus
The Euro continues to trade within a relatively contained range as markets assess the implications of sustained energy price pressure and geopolitical developments in the Middle East.
The Eurozone remains particularly sensitive to energy costs given its reliance on imported gas and oil. A prolonged period of elevated prices would place renewed strain on industrial output and consumer demand, potentially weakening the region’s already fragile growth trajectory.
Against this backdrop, attention is turning to the European Central Bank’s upcoming policy meeting. Markets expect the ECB to adopt a more cautious but vigilant tone, acknowledging inflation risks linked to energy markets while avoiding premature policy commitments.
Strategists broadly expect the ECB to signal that it is closely monitoring developments and stands ready to act if inflation pressures re-accelerate, leaving the door open to pre-emptive policy tightening should conditions require it.
For currency markets, the key question remains whether the ECB will shift toward a more hawkish communication stance, particularly if energy-driven inflation begins to broaden. For now, the Euro continues to trade in line with broader risk sentiment and global rate expectations rather than any decisive shift in ECB policy guidance.
Weekly Data:
19th March
1.15pm - Main Refinancing Rate & Monetary Policy Statement
1.45pm - ECB Press Conference
USD - Federal Reserve pause expected as inflation risks persist
The Dollar has softened modestly at the start of the week as investors position ahead of the Federal Reserve’s March policy meeting, a decision widely expected to leave interest rates unchanged.
The current 3.50 - 3.75% federal funds range is expected to remain in place, with policymakers continuing to emphasise caution as inflation remains above target despite signs of gradual moderation.
Markets have progressively pushed back expectations for US rate cuts, with the consensus now pointing toward September as the earliest plausible timing for policy easing. This repricing has helped stabilise US yields but has also introduced a more balanced outlook for the Dollar in the near term.
At the same time, global macro risks remain firmly on the radar. Ongoing geopolitical tensions are sustaining elevated oil prices, which in turn introduce upside risks to inflation and downside risks to global growth.
From a market perspective, the absence of clear signs of geopolitical de-escalation has led investors to price in the possibility of a more prolonged disruption, reinforcing concerns around a broader stagflationary shock to the global economy.
For currency markets, this environment tends to increase interest rate volatility and reinforce the importance of central bank signalling, particularly as investors recalibrate expectations across the US, UK, and Eurozone simultaneously.
Weekly Data:
18th March
12.30pm - Core PPI m/m & PPI m/m
6.00pm - Federal Funds Rate, FOMC Economic Projections & FOMC Statement
6.30pm - FOMC Press Conference
19th March
12.30pm - Unemployment Claims
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